(Bloomberg) – What will you do when China’s fast-moving markets give investors a taste of the recovery they’ve been waiting for? Buy the country’s beaten-down tech stocks.
Most read from Bloomberg
Big Tech is the China sector most favored by institutions and retailers in the latest MLIV Pulse survey, with 42% of 244 investors saying they plan to increase their exposure to the country. in the next year.
Chalk it up for fear of missing out. The wider the gap between a stock’s price and metrics like earnings and sales, the greater the odds of good news, logically. That comes this month amid signs that China may have begun to move away from its Covid-Zero policy, with widely watched stocks like Alibaba Group Holding Ltd. shows an intraday gain of 20%.
There is plenty of room for recovery. The Hang Seng Technology Index and the Nasdaq China Golden Dragon Index of US-listed companies are down about 70% since peaking in February 2021. The numbers are worse than any of the benchmarks. 92 benchmarks tracked by Bloomberg. In September alone, funds sold $33 billion in Chinese tech stocks, according to a recent note by Morgan Stanley quants.
Clearly, however, nothing has fundamentally changed for the tech industry. There is little evidence that President Xi Jinping will reverse his campaign to rein in the country’s tech giants and efforts to prevent the delisting of Chinese stocks from exchanges. America is progressing slowly. Lockdowns in key cities like Guangzhou serve as a reminder that the determination to eliminate Covid-19 is still holding back consumption and adversely affecting the economy.
But when the Chinese market rallies, they do it with gusto. Short buying and chasing gains have been the main drivers of the country’s stocks over the past three weeks, with mainland investors also taking in bargains in Hong Kong. That’s even as big names like Tiger Global Management get tough on China and reduce their allocations.
On Monday, Chinese stocks and the yuan rose after the country’s financial regulators issued a 16-point directive to support the real estate industry – a sign that authorities are serious about dealing with a crisis that is a major drag on markets and economic growth.
No wonder stocks can be considered cheap. The Golden Dragon Index trades at 15 times less than members’ expected earnings, down 34% from its 10-year average. Investors will gain a better understanding of the health of Chinese companies in the coming weeks, with leaders like Alibaba, JD.com Inc. and Pinduoduo Inc. for reporting results.
Nearly half of market participants who responded to the survey expect US-listed Chinese stocks to recoup some of their losses by the end of the year. Less than a fifth of them saw the decline continue. According to 48% of respondents, markets are underpricing a potential Covid Zero exit. About 46% said markets were too excited about reopening.
Beijing’s virus containment policy is seen as the biggest potential catalyst for gains and the top risk for the Chinese market next year, underscoring its importance to the outlook. Goldman Sachs Group Inc. said the reopening would boost Chinese shares by 20%.
In a likely development, China last week cut quarantines for incoming travelers and removed a so-called circuit breaker system to penalize airlines for bringing in virus cases. this country. The Politburo Standing Committee recently said the country needed to stick with the Covid Zero policy, but officials also needed to be more targeted with their restrictions.
According to the majority of investors, high interest rates will be the main risk for international financial markets next year, leading to a recession in China. A global recession was also among the concerns cited by respondents.
MLIV Pulse is a weekly survey of readers of Bloomberg Professional Services and Websites. The latest poll was taken on November 7-11.
For more market analysis, check out the MLIV Blog. To subscribe and view past MLIV Pulse stories, click here.
–With support from Kasia Klimasinska.
(Updated with a TV clip under Thursday and Monday’s deal on Saturday.)
Most read from Bloomberg Businessweek
© 2022 Bloomberg LP
