Why are Chinese tech stocks trading at a discount to their US peers?

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Investors who’ve been paying attention to Chinese tech stocks will know that it’s been a tough couple of months. Billions of pounds in value have been wiped from some of the country’s big tech companies. Many have seen their share prices plummet at a frightening rate. And at the moment, Chinese tech stocks are trading at a discount to their US peers.

So what’s behind the downturn in Chinese tech stocks? Should investors buy these stocks given that they are currently trading at a discount? Let’s find out.

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Why are Chinese stocks trading at a discount?

Saxo Markets reports that its Chinese Consumer and Technology basket has been its worst-performing basket this year.

The poor performance of Chinese tech stocks stems from a massive crackdown on the tech industry by the Chinese government.

In the last couple of months, China has introduced a series of new regulations for the country’s tech sector. These regulations touch on areas such as anti-monopoly, data privacy and security. 

The crackdown has seen big players in the Chinese tech industry face a series of probes, as well as significant punishments.

For example, e-commerce giant Alibaba received a $2.8 billion (£2.02 billion) fine after an anti-monopoly investigation. And its affiliate, the Ant Group, saw its planned public listing suspended by authorities due to regulatory concerns.

Meanwhile, ride-hailing firm Didi was forced to stop new user registration moments after its big US IPO over data protection issues.

Not surprisingly, these developments have spooked investors and clouded the outlook for Chinese tech stocks, leading to massive sell-offs. As a result, Chinese tech stocks are currently trading at a discount.

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Is now a good time to buy Chinese tech stocks?

Stocks can be volatile and it’s not uncommon for them to rise and fall in value. In the long term, however, the stock market tends to have an upward bias.

In fact, a market downturn typically provides savvy investors with an opportunity to scoop up new stocks for their portfolios, confident that they will profit once the market recovers.

However, in the case of Chinese tech stocks, Peter Garnry, head of equity strategy at Saxo Markets, doesn’t think that now is the time to buy.

First, he reckons that China’s political dimension is likely to continue casting a shadow on the country’s equity market, and the tech sector in particular, for the foreseeable future.

He explains: “The main objectives for China are to clean the environment, reduce inequality, become self-reliant across key technologies such as semiconductors and renewable energy, and ensure that technology companies do not become too powerful reducing competition.

Garnry also believes that investors will not easily forget the recent developments in China. His view is that it’ll be some time before foreign investors regain confidence in the country’s tech sector. He says that as long as Chinese tech sectors are trading at a discount to US tech stocks, investors who are looking for exposure in China should focus on other types of stocks, such as consumer stocks, instead.

Final word

Though the situation in China might be unfavourable to investors, particularly those interested in the country’s tech stocks, this should not discourage you from investing in foreign markets in general.

There are a lot of other foreign markets that are actually quite promising. And you may be able to get a great return on your investment if you do your homework and invest smartly. If you are unsure of the suitability of an investment for your circumstances, it’s always wise to seek professional advice.

The post Why are Chinese tech stocks trading at a discount to their US peers? appeared first on The Motley Fool UK.

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