After $500 Billion Rout, Optimism Grows for China: Tech Watch

Thyagaraju Adinarayan

15 Nov 2021, 09:31 AM IST

(Bloomberg) -- Beaten-down Chinese technology stocks are getting a fresh lease of life and some strategists are calling a turn.

Having buckled under the weight of government crackdowns for much of the year, the Nasdaq Golden Dragon China Index has risen 16% in little more than a month. It’s still down 45% since hitting a record in February, a move that wiped out $500 billion in market value.

“The worst is likely behind us in terms of the regulation intensity and the corresponding shocks to the market,” Goldman Sachs Group Inc. strategist Kinger Lau wrote in a note after conversations with clients.

Notably, a top regulator said last month that they expect to achieve significant progress in crackdowns against fintech firms before the end of the year. And a mandate for President Xi Jinping to potentially rule for life may mean policy continuity and fewer regulatory surprises.

The Golden Dragon gauge climbed 5.1% on Thursday alone, helped by a plethora of positive news that may have boosted investor confidence in the group of stocks. It gained as much as 0.7% Friday. Alibaba Group Holding Ltd. and JD.com’s Singles’ Day shopping festival posted record sales, while Didi Global Inc. was reported to be preparing to relaunch its apps in China by the end of the year, which the ride-hailing company called hearsay.

After $500 Billion Rout, Optimism Grows for China: Tech Watch

The likes of UBS Group AG and BlackRock Inc. agree the worst is likely over as far as Chinese government crackdowns are concerned.

“Regulatory headwinds abating should also provide some space for earnings -- particularly in the internet sectors -- to rebound,” UBS strategist Niall MacLeod wrote in a note Thursday.

What’s more, there’s growing optimism about the China-U.S. relationship with Joe Biden and Xi Jinping set to meet virtually on Monday.

Still, tech-focused stocks have a way to go to recover this year’s rout. Alibaba and Baidu Inc. are by far the worst performers on the NYFANG+ Index, both sliding more than 20%, compared with a 24% jump of the elite tech index. Both trade at a more than 30% discount to average analyst price targets, implying that a rally is expected over the next 12 months.

Cloud Surge

Away from China, a corner of the tech industry that was one of the biggest lockdown-era winners is surging on the way out of it.

Cloud-computing software maker Cloudfare Inc., which helps keep websites secure and load faster, has surged over 160% this year -- more than six times the gain of the Nasdaq 100. Datadog Inc., another software maker, has seen its stock almost double as its industry’s gains seem poised to continue even as the pandemic draws nearer to an end.

The two are among a group of companies that are thriving as workloads continue to migrate from in-house data centers to the cloud as more employees work from home. The surging stocks are in stark contrast to last year’s big winners like Zoom Video Communications Inc. and Peloton Interactive Inc. whose shares have tumbled this year as growth slows.

While supply chain problems and rising inflation have dominated headlines this earnings season, cloud businesses have been among the standout winners. Amazon.com Inc. and Microsoft Corp. were both buoyed by their cloud divisions, whose growth outpaced many of their other businesses in the quarter ended in September.

“It’s a mega trend,” said Eric Jackson, founder of EMJ Capital. “I don’t know how you couldn’t be bullish about it.”

And their steep rallies may have more room to run. Analyst targets project that Cloudflare and Datadog could gain another 13% and 9.8%, respectively, over the next 12 months.

After $500 Billion Rout, Optimism Grows for China: Tech Watch

After $500 Billion Rout, Optimism Grows for China: Tech Watch

Cloud Surge

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