The relentless selloff in Chinese technology stocks continued in Hong Kong on Monday as a lockdown in Shenzhen, a key sector hub, added to investor angst over geopolitical and regulatory risks.
The Hang Seng Tech Index slumped more than 8% during morning trade, with the sector again at the forefront of losses in Hong Kong and China stocks. The Golden Dragon Index, which tracks American depository receipts of Chinese firms, plunged 10% on two consecutive days last week – something that never happened before in its 22-year history.
The tumble follows a spate of events that’s spooked investors, reminding them of regulatory uncertainties from both China and the US. The US Securities and Exchange Commission last week named its first batch of Chinese stocks as part of a crackdown on foreign firms that refuse to open their books to US regulators, intensifying worries of delisting risks.
Separately, a Friday report showed ride hailing company Didi Global Inc. has suspended preparations for its planned Hong Kong listing after failing to appease Beijing’s regulatory demands. Also hammering stocks are a growing Covid-19 outbreak in China that’s clouding the outlook for earnings and economic growth, and Beijing’s potential overture toward Russia that could bring global backlash against Chinese firms.
“At this stage, we still see the technology space as very vulnerable,” said Jun Li, chief investment officer at Power Pacific Investment Management, adding that the firm is avoiding Chinese ADRs. “It is very difficult to evaluate the risk profile at this stage.”
The Hang Seng Index fell as much as 4% on Monday, while China’s benchmark CSI 300 index was down as much as 2.1%, having ended last week with a more than 4% loss in its worst performance since 2008 during the National People’s Congress.
Both Hang Seng Tech Index and the Nasdaq Golden Dragon Index have lost more than 60% from their peaks, respectively. On Monday, Alibaba Group Holding Ltd. sank as much as 8.4% in Hong Kong while Tencent Holdings Ltd., which is headquartered in Shenzhen, was down more than 4%.
“We don’t see a major catalyst in the near term,” for China stocks, though earnings results may create some share price volatility, said Marvin Chen, a strategist at Bloomberg Intelligence. “For a material re-rating of China tech, we may need to see a shift in regulatory tone, and we didn’t get that from the recently concluded NPC meeting.”
Even amid the rout, traders in the mainland have continued to snap up Hong Kong stocks, though that’s proving insufficient to buttress share prices. They have been net buying Hong Kong equities via the stock connect in every session since February 22.
The historic slide in tech stocks is baffling China bulls, the number of which had grown this year as strategists bet on a rebound thanks to policy easing by the People’s Bank of China.
Goldman Sachs Group Inc. strategists toned down their optimism slightly on China stocks, slashing their valuation estimates for the MSCI China Index.
“We stay overweight China on well-anchored growth expectations / targets, easing policy, depressed valuations / sentiment, and low investor positioning,” but lower our 12-month valuation target from 14.5 times to 12 times on changes in the global macro environment and higher geopolitical risks, strategists including Kinger Lau wrote in a note dated Monday.
The MSCI China Index has seen its valuation more than halve from a February 2021 peak. The gauge is trading at about 9 times its 12-month forward earnings estimates, versus a five-year average multiple of 12.6.
For some strategists, now is the chance to add China stocks.
“Valuations are at historic lows and we continue to believe these are good entry points for investors who can look past past-term volatilities,” said Ivan Su, an analyst at Morningstar Investment Management Asia Ltd. “The decline we are seeing in Hong Kong is most likely just sentiment-related. At the end of the day, there’s nothing fundamentally changed about the underlying businesses. ”
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