China's Beaten-Down Tech Stocks Could Be a Buy Now
Chinese tech stocks have tumbled this year, dragging down China’s market and emerging equities more broadly. Those lower prices and a better outlook for 2019 could make this a good time to get into the shares, according to BlackRock‘s chief equity strategist, Kate Moore.
China’s tech sector has been hammered by worries about trade friction with the U.S. Regulatory changes in China also “imposed a drag on revenue for tech and media companies, many of which had grown unfettered and unregulated,” Moore writes in a blog.
Chinese tech earnings surged by 56% in 2017. Yet profit estimates fell throughout 2018, with stock prices following, Moore notes.
China’s tech sector is becoming a critical driver of China’s economic growth, supported by plenty of capital and favorable long-term policy from Beijing. “The Chinese are embracing technology to offset rising labor costs and the pressures of aging populations,” Moore writes. China aims to be more self-sufficient technologically, building its own semiconductor-manufacturing equipment and components, for instance, rather than importing as many goods.
The upshot? The earnings outlook looks brighter for 2019, Moore writes, making this a good time for investors “to dip their toes into Chinese tech at more attractive levels.”
Investors can get exposure to the sector through an exchange-traded fund. The iShares MSCI China ETF (ticker: MCHI) holds 36% of its assets in tech, almost entirely in three stocks: Alibaba Group (BABA), Tencent Holdings (TCEHY) and China Mobile (CHL).
For more targeted exposure, the Invesco China Technology ETF (CQQQ) holds 74 stocks, including dozens of small and midsize companies involved in everything from mobile technology to e-commerce, gaming and semiconductor manufacturing. That makes for a more diversified mix, including many companies that don’t trade with American Depository Receipts, like Sunny Optical Technology Group (Hong Kong.2382) and NetDragon Websoft Holdings (Hong Kong.777).
Stocks in the Invesco ETF have an average market capitalization of $14.4 billion and trade at a forward price/earnings ratio of 15. That doesn’t look expensive if Chinese companies can keep growing earnings in line with their long-term average of 21%, according to Morningstar.
One consideration: Both ETFs are at the mercy of the trade war between the U.S. and China. Tech is at the heart of the dispute. China aims to develop a home-grown tech industry and maintain access to U.S. markets, while the U.S. is pressuring Beijing to stop the alleged theft of intellectual property and production of counterfeit goods in Chinese factories.
Investors should hang on for a volatile ride. After surging 74% in 2017, the Invesco ETF is down 27% this year. Yes, Chinese tech stocks may look cheap. But they could get cheaper if the trade war worsens before getting better.
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