Why Alibaba and other Chinese tech stocks are an exception to Goldman Sachs’ outlook

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Alibaba and other Chinese tech stocks have been battered since early last year.

Qilai Shen/Bloomberg

Chinese tech stocks have been battered since many hit all-time highs in early 2021, and the situation hasn’t improved much in 2022. That may be a compelling reason to at least take a fresh look at this sector. , according

Goldman Sachs
.

Regulatory pressures from Beijing and Washington, D.C., which began in earnest in late 2020, have driven down share prices in the sector relentlessly, with

Ali Baba

(ticker: BABA) losing almost half of its market value last year alone. The picture isn’t much better for peers like

JD.com

(JD),

Baidu

(BIDU), or

NetEase

(NTES).

This year’s sell-off in equities — amid soaring inflation, rising bond yields and the risk of recession — has only added to the headache for investors.

But it’s a tough time in the markets in general. Global bonds are in their first bear market in a generation, crude oil is down 20% in the past three months amid rampant volatility, and megacap stalwarts like

Apple

(AAPL) and

Alphabet

(GOOGL) have been flirting with deep double-digit declines since the start of the year.

Goldman Sachs expects market volatility to continue and does not rule out a recession over the next year. Sharmin Mossavar-Rahmani, who heads the bank’s investment strategy group and is the chief investment officer of its consumer and wealth management division, has stuck to her stance on the safest place.

“We still believe that US equities are the best place to steer in these dangerous waters,” Mossavar-Rahmani said during a media roundtable. last Friday.

The bank doesn’t recommend clients overweight other markets, but Mossavar-Rahmani added that Goldman likes Euzone banks and has even traded China’s tech sector.

Senior Investment Strategist Matheus Dibo describes a trade using stock options. The game is all about using the spread, in which options are used to gain the advantage of a rising stock in price, while limiting the downside by not actually owning the stock.

“The uncertainty is so high, whether it’s domestically because of all the regulations or even overseas with the SEC audit issue,” Dibo said. “Having said that, we think this sector has taken quite a beating.”

These regulatory pressures will not be unknown to investors in Chinese tech stocks.

On a national level,

Ali Baba

and his peers faced tough data security and competition rules as President Xi Jinping tightened his grip on the country’s economy.

Overseas, a disagreement over accounting rules between Chinese authorities and the Securities and Exchange Commission has raised the threat of forced delistings of Chinese tech stocks listed in the United States. Although there has been progress on audit rules, it is not a done deal and remains a significant tail risk.

“There’s a lot of bad news in this industry,” Dibo said. “I think the margin for disappointment going forward is much less.”

After all, valuations have fallen significantly across the sector, the investment strategist said – with current prices down more than 70% from their February 2021 highs and many trading 40% below their March 2020 pandemic peak.

“There are a few things that could push this sector up just because there’s so much negativity in the price,” the investment strategist said.

On the one hand, despite the latest quarterly earnings season revealing a painful financial hangover from China’s disruptive Covid-19 lockdowns, tech companies still beat high street sales expectations by 6% and profit estimates. by 21%. They are doing relatively well.

Goldman will also be watching back and forth on audit rules closely, with the Public Company Accounting Oversight Board currently in China tackling the first wave of reviews under a new deal. The upcoming National Congress of the Communist Party of China – which will take place in October – is another potential catalyst, Dibo noting that the event could see new relevant announcements related to the sector.

And then there’s Singles Day, an e-commerce holiday in China that could be a game-changer this year when it comes to online sales, which could change the dial for the next earnings season.

“But that doesn’t change China’s structural view, which remains much more cautious,” Dibo said. “Investors really haven’t been rewarded for investing in Chinese stocks, despite the dramatic growth you’ve seen in the economy over the past few decades.”

Write to Jack Denton at [email protected]

Garland K. Long