Investor angst over geopolitical and regulatory risks was exacerbated by a lockdown in Shenzhen, a key technology hub, which added to the selloff in Chinese technology stocks on Monday in Hong Kong.
During the first hour of trading, the Hang Seng Technology Index fell by more than 8%, putting the sector at the forefront of losses in Hong Kong and China stocks. The Golden Dragon Index, which tracks the performance of Chinese companies’ American depository receipts, fell by 10% on two consecutive days last week, an occurrence that has never occurred in the index’s 22-year history.
The stock market’s decline comes after a string of events that have alarmed investors, reminding them of regulatory uncertainties in both China and the United States. The Securities and Exchange Commission of the United States named its first batch of Chinese stocks last week as part of a crackdown on foreign companies that refuse to open their books to U.S. regulators, escalating concerns about the possibility of delisting from the stock market.
Separately, according to a report published on Friday, ride-hailing company Didi Global Inc. has put its planned Hong Kong IPO on hold after failing to meet Beijing’s regulatory requirements. A growing Covid-19 outbreak in China, which is clouding the outlook for earnings and economic growth, as well as Beijing’s potential overture toward Russia, which could result in a global backlash against Chinese companies, are also weighing on the stock market.
“At this point, we continue to view the technology space as extremely vulnerable,” said Jun Li, chief investment officer at Power Pacific Investment Management, who also stated that the firm is refraining from investing in Chinese ADRs. “At this point, it is extremely difficult to assess the risk profile,” says the author.
The Hang Seng Index fell as much as 4% on Monday, while China’s benchmark CSI 300 index fell as much as 2.1 percent. The Hang Seng Index had ended last week with a more than 4% loss, marking its worst performance since 2008. The National People’s Congress had caused the CSI 300 index to have its worst performance since 2008.
Both the Hang Seng Technology Index and the Nasdaq Golden Dragon Index have lost more than 60% of their value since their peaks, according to Bloomberg. As of Monday morning, shares of Hong Kong-based Alibaba Group Holdings Ltd. had fallen as much as 8 percent, while shares of Shenzhen-headquartered Tencent Holdings Ltd. had fallen as much as 4 percent.
In the near term, “we don’t see a major catalyst,” according to Marvin Chen, a strategist at Bloomberg Intelligence, though earnings results may cause some share price volatility. “We don’t see a major catalyst in the near term,” he added. “To see a material re-rating of Chinese technology, we may need to see a shift in regulatory tone, which we did not get from the recently concluded NPC meeting,” says the author.
Even in the midst of the sell-off, traders on the Chinese mainland have continued to buy Hong Kong stocks, though this has proven insufficient to keep share prices from plummeting. Since February 22, they have been net buyers of Hong Kong equities through the stock connect in every trading session.
Bulls in China
As a result of the easing of monetary and fiscal policies by China’s central bank, the historic decline in technology stocks has baffled China bulls, whose numbers have increased this year as analysts bet on an economic rebound.
Goldman Sachs Group Inc. strategists have moderated their enthusiasm for Chinese stocks, slashing their valuation estimates as a result of the downgrade.
“We maintain our overweight position in China due to well-anchored growth expectations/targets, easing policy, depressed valuations/sentiment, and low investor positioning,” according to strategists including Kinger Lau, who wrote in a note dated Monday that they had reduced their valuation target from 14.5 times to 12 times due to changes in the global macro environment and increased geopolitical risks.
Some strategists believe that now is a good time to add Chinese stocks to their portfolios.
According to Ivan Su, an analyst at Morningstar Investment Management Asia Ltd, “Valuations are at historic lows, and we continue to believe that these are good entry points for investors who are able to look past near-term volatility.” “It is most likely that the decline we are seeing in Hong Kong is simply a result of negative sentiment.” Finally, the underlying businesses have not been altered in any significant way.