For Chinese Tech stocks that spent the most part of 2021 in dire straits, it looks like they might finally be getting their time in the sun again.
As the U.S listed tech sector gears for a rebound, owing to the fact that the tech-weighted Nasdaq index fell into a correction, stocks like Alibaba and JD.com are outperforming.
The Nasdaq 100 futures, which tracks the largest components of the Nasdaq composite, indicated a rise of 0.9% on Thursday. This comes after the Nasdaq tumbled 1.8% on Wednesday, signalling a 10.7% decline from its highs in mid-November, which placed it firmly in correction territory.
Tech as a whole was performing exceptionally well on Thursday, with names like Apple (ticker: AAPL) and Tesla (ticker: TSLA) experiencing a gain of 0.7% and 2%, respectively, in premarket trading.
Both Alibaba (ticker: BABA) and JD.com (ticker: JD) experienced gains between 6% and 7% in premarket trading. Alibaba’s Hong Kong shares (ticker: 9988. H.K.) rose 5.8% in Thursday’s session in Asia, while JD.com (ticker: 9618. H.K.) climbed 6.5% higher.
Like a lot of things in the investment world, one asset’s fall is another asset’s gain, and this was the case with the tech stocks, whose performance was impressive owing to the fall in bond yields. Many high-growth companies such as those in the technology sector have stock market valuations that depend on the prospect of profits years in the future. What this means is that higher bond yields discount the present value of future cash, thus making those valuations less attractive.
The yield on the benchmark 10-year U.S Treasury note rose to about 1.9% this week, having closed 2021 at 1.51%- it has since retreated to near 1.83%, which is a win for tech investors.
The monetary policy employed in China also had an effect on Chinese tech stocks. Chinese central bank slashed two key rates in a bid to support economic growth. The people’s Bank of China cut its one-year loan prime rate from 3.8% to 3.7%, and the five-year rate, a benchmark for mortgage lending, was reduced from 4.65% to 4.6%. This is the first time the five-year rate has been cut since last April.
“China’s easing measures improved investor risk appetite,” said Jim Reid, strategist at Deutsche Bank.
For high growth stocks like Alibaba and JD.com, a riskier mood benefits them greatly, and yet this comes at a time when Wall Street is faced with a cautious day ahead as investors continue to grapple over the possibility of rising interest rates amid higher inflation. “Sentiment has weaved in and out of positive/ negative territory like the most tangled of hairstyles over the last 24 hours,” said Reid.
In the meantime, analysts are a lot more optimistic about Alibaba and JD.com owning to their recent performance, especially Alibaba. However, it’s important for investors and analysts alike to remember that broader risks still remain for the Chinese sector, especially from regulators.