An Alibaba Group sign
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Chinese tech stocks are soaring. Many have been looking cheap of late, and soothing words from Federal Reserve Chair Jerome Powell only fueled the dip-buying fire.
U.S.-listed shares of Alibaba (ticker: BABA) rose 3% Tuesday and were gaining another 3% in Wednesday’s premarket trading. Fellow Chinese tech giant JD.com (JD) rallied 10.3% Tuesday and the stock rose 2% before U.S. markets opened.
The performance of these companies’ shares in Hong Kong—along with the likes of Tencent (700.H.K.), which jumped 4.5%—helped the Hang Seng Index surge 2.8% Wednesday, outperforming other Asian indexes.
“Valuation is definitely one of the reasons,” Bo Pei, an analyst at broker U.S. Tiger Securities, told Barron’s, speaking of the surge in stock prices for Alibaba and JD.com. “Both are meaningfully cheaper than U.S. peers such as Amazon . ”
Shares in Alibaba and its peers have appeared cheap for a while now, and attractive valuations have led to a recent spate of dip-buying, which continued Wednesday in force.
After all, the sector was battered in 2021 amid pressure on U.S.-listed Chinese stocks and a regulatory crackdown on the tech sector in particular. Alibaba lost around 50% of its market value last year, as it also faced headwinds from concerns of slowing growth. Value on the Hang Seng Tech Index eroded by some one-third in 2021.
“Besides the matter of valuation, Powell’s speaking is another reason for boosting growth stocks today,” Danny Law, an analyst at Guotai Junan Securities—one of China’s largest investment banks—told Barron’s.
Fed Chair Powell appeared before the Senate Tuesday for a hearing on his nomination to lead the central bank for a second term. Powell’s confidence in the U.S. economy and message that the Fed would act to curb high inflation soothed investors’ nerves and spurred a buying streak, especially in tech stocks, of which Alibaba is one.
“Powell’s speaking is easing the worries of much faster rate-hiking, so it is positive to the new economy stocks,” Law added.
Powell’s message came on the back of concerns in the market about tighter monetary policy. Last week, signals suggested the Fed was heading for earlier, faster interest-rate increases—maybe three this year, with the first in March—and an eventual reduction of its balance sheet.
Helping the rally in tech stocks broadly was an easing-off among long-duration Treasury yields, which had spiked.
The yield on the benchmark 10-year U.S. note came down from its Covid-19 pandemic-era high of 1.8% Tuesday and was hovering below 1.75% Wednesday; it began 2022 around 1.53%. Higher yields tend to discount the present value of future cash, and many high-growth stocks like those in tech are banking on profits years in the future.
“The more positive tone appears to have come about as a result of the inability of U.S. Treasury yields to build on their recent gains,” said Michael Hewson, an analyst at broker CMC Markets, referring to the rise in stocks Tuesday and Wednesday.
“Powell insisted that while the Fed was going to start the ball rolling on a normalization process, that it would be a long process from where we are now,” Hewson added.
This all feeds into a bigger picture about Alibaba and other Chinese tech stocks.
Law told Barron’s last week that valuation wasn’t the only reason behind investors buying the dip. Some have followed the move into Alibaba by high-profile fund managers—like Berkshire Hathaway (BRK.A and BRK.B) Vice Chair Charlie Munger, who doubled down on Alibaba stock for the second quarter.
A clearing regulatory picture for the sector, after a year of uncertainty, has also helped, Law said. So too has optimism following Alibaba’s investor day last month, and perhaps some intra-sector rebalancing in favour of the company amid headwinds for Tencent, the analyst added.
Write to Jack Denton at email@example.com