Despite a 40% slump in the Hang Seng Tech Index (HIY00) over the past year that has wiped out $2 trillion of market value, investors remain wary of investing in Chinese technology stocks. Investors remain worried about these stocks even as the year-long government crackdown on the sector seems to be coming to an end.
Predictions of a market bottom in recent months in Chinese technology stocks have been suspect. Recent headlines about investigations by regulators into Alibaba Group Holding, Tencent Holdings, Didi Global, and others have led to sudden drops in Chinese tech stock prices. While the Hang Seng Tech Index has bounced 32% higher from its low in March, it remains more than 30% below its July 2020 level. Over the same period, the Nasdaq 100 ($IUXX) (QQQ) has gained 14%.
This week, Chinese tech stocks received a boost on news that regulators were ending a year-long probe of Didi Global and levying a $1.2 billion fine against the company. That bolstered speculation that Chinese authorities may end their crackdown on the sector. However, investors remain wary as Chinese regulators have increased oversight of live streamers, and Tencent Holdings has remained unable to win approval to launch new games on the mainland.
China’s adherence to its Covid Zero policy is also hurting consumer consumption and weighing on online advertising, a key pillar for e-commerce companies and internet platform operators. Brandes Investment Partners said, “the worst is likely over, but a lower expected growth rate and continued smaller regulatory moves could constrain the attractiveness of the technology sector.”
On the positive side, the recent plunge in Chinese tech stocks has reduced valuations that may entice investors. The Hang Seng Tech Index is now trading at 25 times forward earnings, cheaper than its historical average. However, Natixis said there is still uncertainty in the tech sector as Chinese regulators have yet to “issue clear regulatory red lines on the type of businesses allowed, and the issues on antitrust and data sovereignty remain.” These concerns will keep investors on their toes about China’s tech giants.
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