In the battle of China tech versus U.S. tech, there’s been one clear winner this year.
The technology giants in the U.S. are back at their recent highs, up 15% in 2021, while the CQQQ China tech ETF is lower. Tech names on the mainland continue to struggle as Beijing cracks down on companies such as Alibaba in an anti-monopoly push.
So, should investors stick with the winners in the U.S. or bet on the underdogs in Chinese tech?
The answer depends on the reasoning behind China’s latest moves, according to Gina Sanchez, CEO of Chantico Global and chief market strategist at Lido Advisors.
“If this is truly just an antitrust, anti-competitiveness push, then you can argue that a lot of the bad news is really priced in to these stocks. They have just gotten pummeled and the top stocks in the CQQQ are all well below their five-year and 10-year P/E levels which is to say they could look very attractive,” Sanchez told CNBC’s “Trading Nation” on Thursday.
The CQQQ ETF, which holds stocks such as Tencent and Bilibili, trades at 27 times trailing earnings. In February, it hit a peak of 52 times.
“If this is more than that, if this is a matter of the Chinese government expressing its desire to have key corporates go along with their social agenda, then this could actually morph into something bigger,” said Sanchez.
China’s five-year plan, she pointed out, aims to strengthen the domestic base, broadening wealth creation and boosting consumption power. This could put pressure on its domestic tech companies, she said.
“If this is actually a move to force wages higher, to force broader wealth sharing and to force wealth creation, then in fact the margins that we’ve seen in these companies could actually be changing and the business model could be changing and the PEs that we’ve been used to may no longer be as applicable,” said Sanchez. “That’s the risk that we’re playing right now.”
Matt Maley, chief market strategist at Miller Tabak, agreed that long-term issues remain for Chinese tech stocks. However, after weakness in the first half of the year, they could be due for a short-term bounce.
“Looking at the chart of the CQQQ, it’s formed an inverse head-and-shoulders pattern. Of course, a head-and-shoulders pattern tends to be a bearish one so an inverse head-and-shoulders pattern is a bullish one,” Maley said during the same segment.
“It has to break that neckline that’s up at the $85 level. if we can break above that level, it would surprise a few people, catch them off sides and cause the China tech stocks to outperform for a couple of months,” said Maley.
The CQQQ ETF traded just above $81 a share on Friday. It would need to rally 5% to get to $85.
