(Bloomberg) — What do you do when China’s fast-moving markets offer investors a taste of the boom they’ve been waiting for? Buy the country’s depressed tech stocks.
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Big Tech is the most popular Chinese sector among institutional and retail respondents to the latest MLIV Pulse survey, with 42% of 244 investors also saying they plan to increase their exposure to the country over the next year.
Chalk it up to fear of missing out. The bigger the gap between a stock’s price and metrics like earnings and sales, the greater the potential for profit when good news hits, the logic goes. It comes this month amid signs that China may have begun to pivot away from its Covid-Zero policy, with widely followed stocks such as Alibaba Group Holding Ltd. which shows a 20% increase per day.
There is plenty of room for rebounds. The Hang Seng Tech Index and the Nasdaq Golden Dragon China Index of U.S. companies are down 70% from their February 2021 peak. That’s worse than any of the 92 benchmarks recommended by Bloomberg. In September alone, funds sold $33 billion of Chinese tech stocks, according to a recent note by Morgan Stanley quants.
To be clear, nothing fundamental has changed for the tech industry. There are few signs that President Xi Jinping will reverse his campaign to rein in the country’s tech giants, and efforts to block the delisting of Chinese stocks from US exchanges are moving slowly. Lockdowns in key cities such as Guangzhou serve as a reminder that the drive to eradicate Covid-19 is still stifling consumption and hammering the economy.
But when Chinese markets rise, they do so with gusto. Short-covering and momentum chasing have been the main drivers of the country’s shares over the past three weeks, with mainland investors also buying well in Hong Kong. It’s even like big names like Tiger Global Management are throwing in the towel on China and reducing their allocations.
On Monday, Chinese stocks and the yuan rose after the country’s financial regulator issued a 16-point directive to support the property industry – a sign that authorities are serious about tackling a crisis that has been key to markets and economic growth.
Not surprisingly, stocks can be considered cheap. The golden dragon meter trades below 15 times the estimated earnings of its members, which is a 34% discount from the average of the last 10 years. Investors will get more clarity on the health of China’s companies in the coming weeks, with bellwethers such as Alibaba, JD.com Inc. and Pinduoduo Inc. due to the result of a report.
Almost half of market participants who responded to the survey expect US-listed Chinese stocks to recover some of their losses by the end of the year. Fewer than a fifth of them saw a continued decline. Markets are underpricing a potential Covid Zero exit, according to 48% of respondents. About 46% said markets were too enthusiastic about reopening.
Beijing’s anti-virus policy is seen as both the biggest potential driver of gains and the biggest risk for Chinese markets next year, underscoring how central it has become to the outlook. Goldman Sachs Group Inc. says a reopening would trigger a 20% rise in Chinese stocks.
In a potential development, China last week cut back on quarantines for inbound travelers and scrapped a so-called circuit breaker system that penalizes airlines for bringing virus cases into the country. The Politburo’s new Standing Committee recently said the country needs to stick to the Covid Zero policy, but that officials also need to be more targeted with their restrictions.
High interest rates will be the main risk to global financial markets next year, according to the majority of investors, followed by a slowdown in China. A global recession was also among the concerns cited by respondents.
MLIV Pulse is a weekly survey of Bloomberg Professional Service and website readers. The most recent survey was conducted in November. 7-11.
For more market analysis, see the MLIV blog. To subscribe and see past MLIV Pulse stories, click here.
–With the help of Kasia Klimasinska.
(Updates with a TV clip according to paragraph 5 and trading on Monday the seventh.)
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