China Tech sell-off: To buy or not to buy?
The news headlines across the world all mention the tech stock sell-off in China. Investors are loosing money and their sleep as well. Speculators who used to buy Chinese stocks with borrowed money are now vagabonding and searching for food. But, drama aside, let’s check what’s actually going on. What are the reasons behind the sell-off and how can you benefit from this situation?
The Chinese tech sell-off actually began around three months ago. We mentioned it in one of our earlier articles. The trigger was the margin call on the assets of the Archegos fund for an amount of more than $30 billion, most of which were Chinese tech sector. Banks such as: Nomura, Goldman Sachs, Morgan Stanley and Credit Suisse were forced to sell their client’s positions urgently and at the same time, which triggered the sector’s fall.
The Chinese Central Bank then added insult to injury and initiated regulatory pressure on some private companies active in education. The Chinese government introduced educational reforms in mid-July. This significantly affected companies involved in school education. Such companies will have to become non-profit and can no longer foreign funding. Furthermore, such companies likely will have to register as non-profit organizations. The shares of a large operator in the field of education TAL Education group have lost almost 80% of their value as a result.
The volatility in this sector of the Chinese stock market spread to other industries as well: Chinese Internet companies, shares of e-commerce companies.
Sell-off: Buy or not?
We assume that investors have not recently experienced an increase in regulatory pressure from the Chinese government. As a result, we are facing a panic sell-off. Beneath the chaos the Chinese economy and IT sector in particular still have good fundamentals.
Fresh data from China shows economic growth at 7.9% in the second quarter, boosted by strong industrial production (+ 8.3%), retail sales (+ 13.9%) and fixed assets (12.6%).
On the back of the strong data Shoreline Brokers considers the Chinese sell-off as a good opportunity to increase investments in the tech sector. For example, the majority of Chinese Internet giants trade 2.2 times cheaper than their American counterparts.
We still prioritize collective ETFs over individual stocks, even for those clients with high risk tolerance. One of the recommended tools for investing in China: Invesco China Technology ETF (CQQQ).
How to invest?
Regular purchases are made for our clients who use this instrument in their personal investment portfolios. This allows them to average the purchase price and increase the number of shares in their portfolio. We recommend those clients who do not hold this asset yet to open a position with a horizon of 2-3 years. If you are interested in this topic and would like advice about this selection – contact us. We will be happy to help!