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Faster US inflation and weaker Chinese credit impulses are bad signs for growth stocks. Photo: Shutterstock

‘Don’t try to catch a falling knife’ as red flags from China credit data, US inflation pressure growth stocks

  • Hang Seng Tech Index slipped below the 200-day moving average line this month, a bearish sign for stocks even after a 31 per cent plunge
  • Tencent’s rally since 2010 and its current reversal mirrors Nasdaq’s blistering decade before the 2000 dotcom crash
Chinese growth stocks have slipped below a technical indicator this month, underpinning Big Tech’s HK$4.28 trillion (US$555 billion) wipeout in Hong Kong since they peaked three months ago. It’s a bearish sign that prompted analysts at BCA Research to warn: don’t try to catch a falling knife.

The Hang Seng Tech Index, whose members are probably the best proxy for growth stocks, slipped below the 200-day moving average line earlier this month, the first time since the gauge was introduced in July, according to Bloomberg data.

The gauge fell 4.9 per cent last week, bringing the slump from its February 17 record to 31 per cent. Tencent Holdings and Alibaba Group Holding, the owner of this newspaper, slipped 23 per cent while Meituan sank 46 per cent in the period. After penalising Alibaba and probing Meituan, Beijing has now turned the heat on ride-hailing providers.
“Their regulatory scrutiny will continue, which will depress their share prices,” strategists at BCA Research including Arthur Budaghyan and Ellen JingYuan He said, referring to antitrust probes within China’s tech industry. “The riot in global growth stocks will persist.”

Red flags from recent Chinese credit data, where aggregate financing and new loans surprised on the downside, suggest more cracks in other parts of the market could emerge, they wrote in a May 13 report. Faster US inflation would also undermine growth stocks, they added, and investors should not try to catch a falling knife.

Aggregate financing fell 45 per cent to 1.85 trillion yuan in April, while new loans almost halved to 1.47 trillion yuan, BCA Research said, reflecting the central bank’s priority to stem financial risks rather than stimulate the domestic economy. Beijing is likely to continue paring back stimulus as the economy exits from pandemic-era crisis mode, it added.

“Stocks will be in for a great amount of volatility in this inflation-sensitive period, given the heavy reliance on loose monetary policies,” said Wei Wei, an analyst at Ping An Securities. “Overvalued bets in technology stocks will face a new bout of pressure over their price-earnings multiple.”

Gains in growth stocks have been huge and valuations have become expensive, said Alan Li, portfolio manager at Atta Capital in Hong Kong, who is concerned about an earlier end to quantitative easing. “When liquidity is not as much as before, these stocks will face pressure to slide further.”

Treasury yields rose by 5 to 6 basis points last week, according to Bloomberg data, after a stronger than expected jump in US consumer prices in April, while the Fed attempted to downplay the spurt as transitory. Yet, optimists have been chastised by recent bouts of market volatility.

While mega-cap tech should remain a core long-term portfolio holding, investors should be careful to avoid over-allocation to the sector, according to UBS Group’s Chief Investment Office, whose late-April call to re-allocate money to such stocks has backfired so far, as the NYSE FANG+ and Nasdaq 100 gauges tumbled.

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Mega-cap tech names account for around 18 per cent of global equities and about 25 per cent of the S&P 500. A tech portfolio allocation between those two ratios “offers a reasonable proxy for our neutral stance on technology,” it said.

BCA Research has another worrying sign for the market to ponder. Like its Big Tech peers in the US, Tencent’s stock reversal since its record-high in January has come after an 11-year rally that mirrored the pace of Nasdaq 100 Index’s blistering decade through 2000, before the dotcom bubble burst.

“I don’t think tech stocks have already bottomed out in the short term,” said Gary Ching, Hong Kong-based chief analyst for macroeconomic and strategy at Guosen Securities. “The antitrust campaign is still ongoing, it’s uncertain how many more second-tier and third-tier tech stocks will be impacted.”

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