Panic selling has led to a resurgence of China Tech stocks
Shares of Chinese technology continued to sell flat on Monday, as Beijing’s close ties with Russia increased the risk for mainland companies suffering from already regulated headwinds.
The Hang Seng Tech Index fell more than 9%, preparing for the biggest drop since the gauge was introduced in July 2020, with large losses in shares of Hong Kong and China. The Golden Dragon Index, which tracks Chinese companies’ U.S. depository receipts, fell 10% in two consecutive days last week – the first time in its 22-year history.
The controversy erupted after a report showed that Russia had sought military assistance from China for the war in Ukraine. Traders are worried that Vladimir Putin’s potential Beijing overcharge could provoke a global backlash against Chinese companies, even imposing sanctions.
That comes at the peak of regulatory concern. The U.S. Securities and Exchange Commission last week named the first batch of Chinese stocks as part of a crackdown on foreign companies that refused to open their books to U.S. regulators, increasing the delisting risk. Also, the rising prevalence of Covid-19 in China and the lockdown in tech hub Shenzhen have clouded earnings outlook.
“At this point, we still see the technology space as very insecure,” said Jun Lee, chief investment officer at Power Pacific Investment Management. “It is very difficult to assess the risk profile at this stage.”
On Monday, the Hang Seng Index fell 4.8%, while China’s benchmark CSI 300 Index fell 3.1%. The onshore yuan also weakened the most in a month as sentiment about Chinese assets soured.
Read: Lockdown exacerbates China’s crisis, traders drop yuan, snap bonds
Both the Hang Seng Tech Index and the Nasdaq Golden Dragon Index are down more than 60% from their peaks, respectively. On Monday, Alibaba Group Holdings Ltd. plunged 9.6% in Hong Kong, while Tencent Holdings Ltd., headquartered in Shenzhen, fell more than 6%.
“We don’t see a major catalyst in the near term,” said Marvin Chen, a Bloomberg Intelligence strategist, for Chinese stocks, although earnings results could create volatility in the share price. “For China Tech’s material re-rating, we may need to see a change in regulatory tone and we did not get it from the recent NPC meeting.”
Despite the defeat, mainland traders continued to pick up Hong Kong stocks, albeit insufficient to raise share prices. They have been making net purchases of Hong Kong equity through stock connect every session since 22 February.
A historic slide in tech stocks has stunned the China Bulls, whose numbers have risen this year as strategists bet on a rebound for easing policy by the People’s Bank of China.
Goldman Sachs Group Inc. Strategists eased their optimism over China stocks, lowering their valuation forecasts for the MSCI China Index.
“We place a lot of weight on China with good-encrusted growth expectations / targets, easy policy, disappointing valuations / sentiment and low investor positioning,” but due to changes in the global macro environment and our 12-month valuation target fell 12 times from 14.5 times. High geopolitical risks, strategists including King Lau wrote in Monday’s note.
The MSCI China Index has seen its valuation more than half of its February 2021 peak. Gage is trading at approximately 9 times its 12-month forward earnings compared to its five-year average of 12.6.
For some strategists, now is the time to add Chinese stock.
Evan Sue, an analyst at Morningstar Investment Management Asia Ltd., said: Mostly just related to emotions. At the end of the day, nothing fundamentally changed about the underlying businesses. ”