After a blistering start to 2023, stocks are in the midst of a late-summer slog, one that has intensified overseas, particularly for Chinese tech names.
August has been a difficult month for the market, including the tech-heavy
Nasdaq Composite,
which hds fallen 5.7% month to date through Wednesday. And the picture doesn’t look much better in China.
Chinese tech stocks have struggled to gain traction in recent years, with the KraneShares CSI China Internet ETF (ticker:
KWEB
) peaking in early 2021. Investors are understandably more cautious on these companies than on their U.S. counterparts, given concerns about corporate transparency and the impact of policies from Beijing. Worries have only increased given frosty relations between the U.S. and China and that nation’s struggle to jump-start its postpandemic economy.
Stocks that feature prominently in the KraneShares fund, such as
Tencent Holdings
’ American depositary receipts (TCEHY) and
Alibaba Group Holding
(BABA), are in the red so far in 2023, even as U.S. tech names have led a domestic rally.
“It’s impossible, or nearly so, to find a positive spin on anything happening in China,” noted strategists at Sentiment Trader on Wednesday. “Chinese technology companies are arguably even more of a focus for investors outside of that country due to their scale, market penetration, and historically cheap valuations. It has been difficult for their shares to gain traction among domestic and foreign investors due to all the issues we hear about ad nauseam.”
The firm noted that Chinese tech stocks have hit a ceiling before. The group soared in July, so that at the end of the month more than 90% of stocks in the CSI Overseas China Internet Index, which the KraneShares ETF tracks, were above their 50-day moving averages. Just over two weeks later, just 40% were.
“Since the sector peaked in 2020, there have been three similar cycles, and all preceded months more of pain,” Sentiment Trader noted.
The pattern of reversals extends back well before the pandemic too, but the latest shift between 90% and 40% was the second-fastest since the 2008-2009 financial crisis, Sentiment Trader said. At just nine trading days long, it tied a 2018 reversal for brevity and was just one day longer than the shortest cycle, which occurred in mid-2008.
“Investors have abandoned ship at a historically rapid pace,” it said. “Unlike most other markets, quick shifts in sentiment have not consistently preceded rebounds. Of the nine other times when investors behaved similarly, only one enjoyed a positive return two or three months later.”
The upshot is that history makes it even harder than usual to be optimistic about trying to catch a falling knife within the group. “Currently, the indicators we track mostly show deteriorating conditions but oversold indications are few and far between,” the firm concludes. “It has not been a good sign when we’ve seen deterioration like we’re seeing now.”
It’s an outlook shared by other market strategists as well in recent months, Barron’s has noted. Some have argued that better growth is to be found elsewhere, such as in India, whose population recently surpassed China’s, or in other developing markets.
Write to Teresa Rivas at [email protected]
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