China’s biggest tech stocks in Hong Kong are worth a punt as the nation’s stringent zero-Covid policy “has passed its near-term peak and some common-sense pragmatism” will begin to manifest, according to Alpine Macro.
The Montreal-based research firm recommended opening a speculative long position on the Hang Seng Tech Index as a way to bet on the phasing out of China’s zero-Covid restrictions and a gradual recovery in business activity.
“Chinese tech companies are likely trading at trough earnings with trough multiples,” Yan Wang, chief emerging markets and China strategist, wrote in a report published on Tuesday. “Investors’ near unanimously bearish sentiment on this sector also means that the sell-off pressure has been largely exhausted, further limiting downside risks.”
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Meanwhile, the number of newly infected Covid-19 cases has been falling, which is likely to further facilitate this shift in policy and business activity, he added. Shanghai is unravelling the citywide lockdown with gradual reopening from June 1 under a 50-point plan unveiled on Sunday to begin repairing its economy.
Chinese tech stocks also look cheap, having fallen over 60 per cent from their February 2021 peak. Hang Seng Tech Index members trade at about 10 times price-earnings ratio, compared with almost 40 times for stocks in the Nasdaq Composite Index, or about nine times the broader Hong Kong market.
Alpine Macro’s stance stands in contrast to that of Manuel Muehl, a Frankfurt-based analyst at DZ Bank, who is maintaining a sell rating on Alibaba and has cut the price target of its US-traded shares by 15 per cent.
The 30-member Tech Index rose 1 per cent in May, adding to a 2.1 per cent gain in April. Still, the gauge has slumped 21 per cent since the start of the year, weighed down by delisting fears and lingering concerns about Beijing’s regulatory crackdown. Both risk factors have since waned, Yan said in the report.
Alpine Macro, which has been relatively bearish on Chinese stocks because of the zero-Covid fallout, remains guarded on the longer-term outlook because the full impact of lockdowns on corporate earnings remains worrisome.
Existing earnings expectations are unrealistically benign in the current dire macro situation, Yan said. While the tech sector is now less vulnerable to Covid-induced disruptions, the upside is capped as earnings are likely to disappoint, he added.
From a long-term point of view, the zero-Covid mishap has dealt a heavy blow to the credibility of Chinese policymakers, which will not heal even after the policy is phased out, Alpine Macro said.
“The image of a group of competent technocrats that are capable of navigating the country through turbulences has been shattered, and their ability to self-correct policy mistakes has been questioned, particularly among foreign investors,” Yan said. “It remains to be seen how Beijing can improve investors’ perception of governance in China going forward.”
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