China tech rout: views diverge on market purge of ‘uninvestable’ stocks as ‘fear feeds on itself’
- Investors face a roller-coaster ride as Chinese tech stocks rebounded amid speculation China will step in to help instil confidence
- Views diverge among money managers and seasoned China analysts in one of the wildest swings in recent market history
The slump during Asia’s trading hours on Tuesday wiped out US$300 billion from the Hong Kong market alone, while an 8 per cent dive in Shanghai over two days was the worst since August 2015. If the Wall Street bank is right, and prices retraced to its discounted price targets, investors should brace for more pain.
Alpine Macro: sell-off ignores classic ‘sweet spot’ in market
“Overseas-listed Chinese tech stocks represent less than 2 per cent of the MSCI All-Country-World’s market capitalisation,” said Wang Yan, chief emerging markets and China strategist. “Wholesale liquidation of these stocks may not be a meaningful part of diversified global portfolios, but it is more than enough to devastate this asset class.
“A deeper worry among investors is China’s recent regulatory crackdown on the tech sector. This is a legitimate concern, but we believe that here too, the market has exaggerated the negative impact.
“Cyclically, the Chinese authorities are shifting their focus to supporting growth. There could be lingering concerns on specific companies, but overall, the regulatory risk for the tech sector should have passed peak thrust.
“The massive sell-off has coincided with encouraging signs of recovery in the real economy. Meanwhile, policy settings will remain accommodative. Therefore, it is baffling to see Chinese equities’ disastrous performance in what should be a classic “sweet spot” of improving growth and easing policy,” he added.
UBS Global Wealth Management: flagging weak tech and property names
“We continue to avoid some of the profitless tech names. Property has been an area of sensitivity. Market chatter on property balance sheets remains very negative, a lot of rumours continue to swirl around. New bank lending also fell more than expected in February, with household loans showing a rare contraction.
“To us, this suggests buyers are still sitting on the sidelines amid specific fears with some of these big developer names and also the broader macro situation in China. Even with these kind of valuations, we rate Chinese property as least preferred.”
Jefferies: fear feeding on itself
“Ultimately, both the China Securities Regulatory Commission (CSRC) through pre-IPO scrutiny and the SEC’s rules over the auditing will change the landscape for China ADRs,” analysts led by Sean Darby said in a report. “There are questions over whether the ADR asset class will become a geopolitical weapon just as tariffs were used in the US-China trade dispute.
“China wants to maintain harmonious relations with Europe – its largest trading partner. It is very hard to see that sanctions could be imposed on China when Europe is still purchasing gas from Russia.”
05:12
‘No choice’: Hong Kong security boss says residents asked to go into Covid isolation must comply
With Hang Seng forward price-earnings multiple of 8.6 times on March 15, and trading at 22 per cent discount to its 260-day moving average, “a great deal of bad news is in the price,” they added.
Saxo Bank: overselling in bear market not a buying reason
The sell-off in Chinese internet stocks is part of a bigger picture where global equities are entering into a bear market with inflation, said Redmond Wong, market strategist at Saxo Markets. High-flying expensive stocks have seen significant derating and Chinese internet stocks are no exception.
“These stocks have however been hit harder given the tighter regulatory environments in the area of antitrust, data security, consumer and labour protection,” he added. “Weak credit growth, Covid-19 lockdowns and fear of deceleration in [weak] export growth [have added to the] negative tone.
“In a bear market, being technically oversold is not a reason to buy for everyday investors. Rebounds can be fast and short-lived.”
Industrial Securities: not time for bargain hunting
“Given such near-term uncertainty, one should not hastily gamble in bargain hunting,” Zhang Yidong, global chief investment strategist at Industrial Securities said in a report. “Avoid assets affected by the regulatory policies of China and the US, and instead invest based on medium and long-term fundamentals.”
He recommends defensive stocks such as state-owned enterprises focused on new energy, finance, real estate and telecoms as they “are reliable with low regulatory risk and can better adapt to the current policy environment, benefiting from the policymakers’ goal of steady economic growth.”
