Global Tech Rally Fractures as Investors Cool on Chinese Firms
August 26 2018 - 12:29PM
Dow Jones News
By Akane Otani and Steven Russolillo
One of last year's most profitable trades is breaking apart,
thwarting expectations for global investors betting on a handful of
U.S. and Chinese technology titans' enduring dominance.
For much of the most recent leg of the bull market, investors
searching for growth piled into shares of a group loosely known as
"FAANG-BAT," comprising U.S. tech giants Facebook Inc., Apple Inc.,
Amazon.com Inc., Netflix Inc. and Alphabet Inc., as well as Chinese
firms Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings
Ltd.
The group of stocks collectively rocketed 62% higher last year,
more than tripling the S&P 500's gains. But that trade has
begun to fracture in recent months, reflecting escalating trade
tensions between China and the U.S., doubts about the global
economy's health and uncertainty whether the tech sector's rally
has gone too far.
While the U.S. FAANG stocks have continued their surge with a
38% gain this year, the BAT group is down 5.3%, although it remains
well above an index of mainland Chinese listed stocks, the Shanghai
Composite, which is down 17%.
Some investors are asking whether a pullback in China's tech
firms may presage a similar one in the U.S., and if so which stocks
might lead the market higher next -- as well as whether the
longest-ever U.S. stock bull market may be on borrowed time.
"The market feasted all of 2017. This year it's been a very
different environment," said Matt Forester, chief investment
officer of BNY Mellon's Lockwood Advisors. When cracks appear in
sectors that have dominated, like technology, "it's difficult to
see whether you're seeing a signal or if it's just a correction for
what's been a very strong sector of the market."
Technology stocks have continued to power much of the broader
market's gains in the U.S., with Apple becoming the first American
company to top $1 trillion in market value and Amazon's most recent
quarterly profit soaring to a record on the back of its
cloud-computing, advertising and retail businesses.
But the biggest Chinese tech stocks have stumbled this year as
investors have grown warier of slowing growth, possible government
regulation and fractious trade negotiations.
After rising at a more than 40% annualized rate over the 10
years through 2017, Tencent has tumbled 13% this year, at one point
wiping out over $175 billion in market value. This month the
world's largest videogame publisher by revenue reported a surprise
drop in quarterly profit from a year ago for the first time in more
than a decade. The restructuring of two regulatory agencies
overseeing videogame content in China has delayed game approvals,
hurting Tencent's largest business.
"The lesson here is no monopoly is safe in China," says Ben
Harburg, a managing partner at MSA Capital, a Chinese venture
fund.
It isn't just Tencent that has fallen on tough times. Chinese
e-commerce titan Alibaba has dropped 17% from a record high in June
and is only slightly higher for the year. Baidu, which operates
China's largest search engine, is down 4.2% for 2018.
The declines in global tech stocks strike many investors as long
overdue. Global fund managers have identified bets on FAANG-BAT as
the most crowded trade in the market for seven straight months,
according to a monthly survey conducted by Bank of America Merrill
Lynch.
Some investors believe that Chinese tech stocks are simply
pausing after a rapid growth spurt and may still continue to climb
higher.
"This thing had to cool down at some point and readjust to more
rational expectations," said MSA Capital's Mr. Harburg.
Wall Street analysts who cover the Chinese tech giants remain
optimistic, with few "sell" ratings among dozens of "buy" ratings.
Even though U.S. technology stocks are outpacing their Chinese
counterparts this year, they, too, have been more volatile in
recent months, for instance following disappointing earnings this
summer from Facebook, Netflix, Twitter Inc. and Intel Corp.
Yet other analysts warn that investors may be underpricing the
risk of divergence more broadly within the markets as global
central banks slowly turn off the spigots that have helped risky
assets rise higher since the financial crisis.
"The propensity to sell winners is becoming greater as people
fear that maybe the top in the market is close," said Nitin
Saksena, head of U.S. equity derivatives research at Bank of
America Merrill Lynch. "That shift in psychology seems palpable
compared to last year."
Write to Akane Otani at akane.otani@wsj.com and Steven
Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
August 26, 2018 12:14 ET (16:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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