The ongoing artificial intelligence (AI) frenzy has sparked a recovery in Chinese technology stocks. The Golden Dragon Invesco ETF (PGJ) is up +15% month-to-date, beating most global stock indexes and ETFs. The Golden Dragon Invesco ETF has beaten the broader Nasdaq 100 Stock Index ($IUXX) (QQQ) for three consecutive weeks, the first time that has happened since January. Some analysts believe the bullish momentum can continue.
Several factors are fueling the rally in Chinese technology stocks. Chinese tech companies are seeing support from improving profit expectations, stronger-than-expected sales data following a key China shopping festival, and an easing of U.S.-China geopolitical tensions. Finally, Chinese technology stocks are trading near the cheapest value relative to their U.S. peers in data going back to 2006.
Chinese technology stocks have been under pressure for most of this year as an expected strong post-pandemic rally in China failed to materialize. That has curbed the growth potential for tech stocks due to the still-weak economic outlook. Also, many analysts who had been solidly bullish on Chinese tech stocks have started to cut their China Index targets in recent weeks. Goldman Sachs, Nomura Holdings, and Morgan Stanley have all cut their MSCI China Index targets for this year by at least 11%.
However, some positive developments have emerged that may keep the upside momentum going for China’s technology stocks. Over the past weekend, China’s second biggest annual online shopping event called the 6.18 shopping festival, wrapped up with analysts citing better-than-expected sales. That has prompted analysts to raise their earnings forecast for Alibaba Group Holding (BABA) and Tencent Holdings Ltd (TCEHY) to the highest since 2021, according to Bloomberg data.
The improving sentiment toward Chinese technology stocks may encourage more investors into the sector that has been mostly shunned this year. Gam Investment Management said a “better regulatory environment, better-than-expected quarterly earnings results, and improving profitability” are positive factors for the sector. However, “the stock price performance of the sector has not reflected these improvements due to the very cautious investor sentiment.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
