As US-China trade tensions rumble on, tech stocks on the Chinese stock market are feeling the heat. BATS stocks – Baidu [BIDU], Alibaba [BABA], Tencent [TCEHY], and Sina [SINA] – and others have experienced share price volatility throughout the year as tensions between the two superpowers have continued to simmer.
Should these problems steer traders away from tech shares on the Chinese stock market? Or does the possibility of US President Donald Trump and Chinese President Xi Jinping coming to a resolution present an opportunity for entry?
The case for buying
At the end of October, Invesco’s Kristina Hooper told CNBC that now is the best time to buy BATS stocks. She said she believed that China has the most to gain from trade negotiations, and therefore the country’s stock market is likely to rise in the near future.
“This could be a scenario where China is actually able to stimulate its economy enough to ride out this war,” she told the news outlet. “We’re looking at the potential for more fiscal stimulus, more monetary policy stimulus and so that could put China tech higher than where it is today.”
Hooper believes that with the stocks currently holding low valuations and positive price-to-sales ratios, BATS stocks are “just screaming” for a buy.
“This could be a scenario where China is actually able to stimulate its economy enough to ride out this war. We’re looking at the potential for more fiscal stimulus, more monetary policy stimulus and so that could put China tech higher than where it is today” - Invesco Chief Global Market Strategist Kristina Hooper
These comments arrived as a tentative agreement had been secured between the US and China at the start of October, a deal that was expected to be finalised at the start of November. The anticipation that a deal would halt the commercial conflict between the two global economic leaders sent the share price for Chinese carmaker Nio [NIO] up by 31%, Baidu up by 21% and Alibaba up by 11.4% (from the beginning of October through 8 November).
These rallies did not last, however. Global stocks took a dip once again as President Trump last week declared that even higher levies than previously stated would be enacted if talks between the two nations faltered. The move highlighted how hard it is to predict where talks are going, and which direction Chinese tech stocks will move in response. This makes them a tricky investment.
At the start of Wednesday 13 November, Asia-Pacific stocks fell on growing worries that US-China trade talks were stalling. The MSCI All Country Asia ex Japan ETF [AAXJ] fell by 0.9%, Australian stock market index S&P/ASX200 [AXJO] by 0.8%, and Japan’s Nikkei 225 stock index [N225] fell by 0.85%.
The DJI method
Chinese tech stocks will continue to be closely scrutinised by Wall Street. And while the companies affected may not have the power to steer talks between the two superpowers, there may be some action they could take on an individual level.
Chinese drone maker SZ DJI Technology Co, for example, has been conducting some “textbook” lobbying in Washington by attaching itself closely to parts of the government and responding quickly to any political concerns, according to the Financial Times.
Like Huawei, ByteDance (which is rumoured to be eyeing up a 2020 Hong Kong IPO) and many other Chinese tech firms, DJI has been on the US government’s radar. At the start of November, the US’s Department of the Interior temporarily grounded a fleet of 810 drones, an estimated 15% of which were manufactured by DJI, as it assessed whether drones from the nation present a threat to national security.
In response, the company has been working to develop a new model of drone designed specifically for the US government, which gives users control of their own data, according to the FT. Additionally, DJI has linked closely with the Federal Aviation Administration in the country and hired Washington figures such as Mark Aitken, a former industry lobbyist.
The result is that the Trump administration is now split over whether to ban DJI drones or take a softer approach. While DJI is not listed in the US, and it is unclear what impact these actions could have on its share price, traders will look keenly on at the actions of individual Chinese tech companies, and how each reacts to this heightened scrutiny.
|PE ratio (TTM)||8.94||52.14||31.33||18.72|
|Quarterly Revenue Growth (YoY)||-1.20%||39.80%||20.60%||0.80%|
Baidu, Alibaba, Tencent & Sina share price vitals, Yahoo Finance, 21 November 2019
Analyst recommendations collected by CNN show that Baidu, Alibaba and Tencent are all considered a buy. Meanwhile, Nio is considered a hold.
Out of the stock price forecasts collected by CNN, each of these stocks are expected to see an upside in the next 12 months.