Which ETF can best leverage Chinese tech’s return to growth?

The Invesco China Technology ETF had a challenging 2022 as China cracked down on large corporations and maintained its Covid-19 restrictions. However, with these restrictions easing and the government prioritising growth, its shares have shot up 45% since November, and 7% in 2023 so far.

- The Invesco China Technology ETF rebounds 45% since November.

- Chinese shares are up as government pulls back on restrictions and prioritises growth.

- Major holdings Tencent and Baidu both share positive analyst outlooks.

The Invesco China Technology ETF [CQQQ] holds companies that operate within China’s vast technology sector. The value of the fund has been on a roller coaster over the last year, as the country’s strict zero-Covid policy hurt Chinese equities for much of the year.

These restrictions have since eased, and shares have rebounded in the last few months. The fund is up 6.9% year-to-date, but down 9.2% over the last 12 months. It has jumped 45.3% since the beginning of November.

Alongside Covid restrictions last year, the country also imposed regulations that suppressed Chinese technology stocks, and in turn the Invesco China Technology ETF. The Chinese government instigated a regulatory crackdown on the country’s tech giants beginning in the middle of 2021. However, with the country now prioritising growth, many of these regulations have been eased.

The Invesco China Technology ETF holds 130 Chinese tech equities as of 3 March, with 43.3% of the portfolio allocated to companies operating within the information technology sector, 38.4% within the communication services sector and 15.3% within the consumer discretionary market.

Tencent and Baidu dominate the top holdings

The fund’s largest holding, Tencent [0700.HK], makes up a considerable 10.95% of the fund’s total value. The company is the world’s largest video game vendor, with a market capitalisation of $3.47trn. The gaming giant’s shares are down 6% over the last 12 months, but up 14.4% year-to-date.

The recent rally for Tencent shares came after Chinese regulators granted it new gaming licenses, after having restricted the gaming industry within the country as it tried to address addiction to games among minors. A cool-down on restrictions from China’s government is good news for Tencent, which will be looking to win new licences over the coming months.

The fund’s second-largest holding is Chinese online search giant Baidu [9888.HK], with the position making up 9.49% of the total fund value. Shares in Baidu have performed well despite all odds, having gained 32.1% year-to-date and 5.2% over the past 12 months.

The search giant is deploying new artificial intelligence (AI) technology, and has announced plans to launch its chatbot Wenxin Yiyan, or ERNIE Bot, in early February.

Where next for the Invesco China Technology ETF?

The outlook for equities within China has brightened once again after a period of high uncertainty. Since the beginning of the year, investors have already bought a record $21bn-worth of Chinese equities—signalling a rapidly brightening outlook.

Tencent, the fund’s largest holding, has strong analyst forecasts as the prospects for Chinese tech stocks improves. Out of 56 analysts polled by Refinitiv, 20 rate the shares a ‘buy’, 28 ‘outperform’, six ‘hold’, one ‘underperform’, and one ‘sell’.

Baidu has similarly strong analyst forecasts. Out of 26 analysts polled by Refinitiv, 13 gave ‘buy’ ratings, 9 ‘outperform’, four ‘hold’ and one ‘underperform’. Alongside this, out of 22 analysts offering 12-month price forecasts, the median of $179.90 represents 17.2% upside on the shares’ most recent closing price of HK$147.50.