Is a Chinese Tech Stock Boom Coming?

UBS Strategists Tout Chinese Tech Stocks amid Valuation Concerns in the US

Chinese internet stocks present a solid investment opportunity compared to US big tech companies. That’s the sentiment echoed by strategists at UBS Group AG, who believe Chinese internet stocks will do much better in 2024 compared to their counterparts in the US. The sentiments come amid growing valuation concerns on the US tech stocks exploding in 2023 amid the artificial intelligence boom.

Tech Valuation Concerns

Tech heavy NASDAQ index is already up by more than 40% for the year at the back of a blockbuster year. While the rally has been fuelled by solid earnings results and the artificial intelligence boom; it’s starting to show some weakness amid valuation concerns and the high-interest rate environment.

The US Federal Reserve hinting at retaining the high-interest rates for longer is the most significant headwind that could take a toll on US tech giants heading into 2024. The high-interest rate environment is already posing significant risk to the economy, with economists worried about a mild recession amid reduced borrowing needed to fuel economic activity.

UBS strategists insist the rising earnings expectations and depressed valuation make Chinese tech stocks like Alibaba a solid prospect heading into the New Year. The stocks have struggled to gain traction in 2023 as US tech giants hit new highs, as investors turned to them in expectation that the Fed will cut interest rates at the end of the year.

With the high interest rates likely to stay put for long, investors must look elsewhere for opportunities. Chinese tech shares are only starting to bounce back after years of underperformance triggered by Beijing’s crackdown on internet giants.

Chinese Stock Recovery

A recovery of the Chinese economy from the COVID-19 slowdown has once again improved the stock’s prospects on the back of easing regulatory pressure. Taiwan Semiconductor and Samsung are some of the semiconductor players that UBS strategists believe provide a solid risk-reward as they trade cheaply despite their tech advantage.

Over the years, Chinese tech stocks have lagged behind US tech giants despite the company’s efforts to cut costs and shore up earnings. However, that is slowly changing as investors take note of the depressed valuation amid improving valuations. Nasdaq Golden Dragon China Index, which counts some of the biggest Chinese internet giants, trades at a 30% discount compared to the Nasdaq 100 Index on price-to-earnings ratio, affirming the cheap valuation in play.

UBS strategists maintain a cautious approach to US tech giants led by the magnificent seven that have been at the forefront in fuelling the rally in the US equity markets. The strategists have already dropped their outlook on the likes of Apple and Tesla, facing profit concerns despite commanding premium valuations in the market.

The strategists have raised concerns about the faltering earnings trend in most US tech giants that need help with saturation and competition in their respective fields. Apple is one of the companies struggling to sell as many iPhones as it used to amid smartphone saturation. Tesla is also under immense pressure amid stiff competition in electric vehicles, especially in China.

Tech stocks aside, US strategists are turning their attention to software companies. The strategists say the companies are well positioned to do well, given their defensive nature and high recurring revenue streams.

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