(Bloomberg) — As China’s post-Covid recovery loses steam, earnings are unlikely to provide the boost that the country’s tech stocks could really use.
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JD.com Inc. starts the reporting season on Thursday with analysts projecting less than 1% revenue growth for the first quarter, which would be the slowest pace on record, Bloomberg-compiled data show. Next week, Alibaba Group Holding Ltd. will likely report a sub-3% sales increase, while Tencent Holdings Ltd. may still trail the double-digit pace of the past, according to estimates.
The lackluster expectations are fueling traders to snap up bearish bets in the options market. The put-to-call ratio for Alibaba’s Hong Kong shares rose to the highest level since October, according to data compiled by Bloomberg. Earnings consensus for members of the Hang Seng Tech Index has barely moved from record lows reached in March.
Tech stocks have languished since hitting January peaks as China’s consumption-led rebound turned out to be more muted than expected. While upside surprise to earnings can help lift sentiment, the sector faces headwinds from amped up US-China tensions and high global interest rates, meaning a sustained rebound would be hard to come by.
The market had “potentially gotten ahead of itself earlier in the year,” said Robert Lea, an analyst for Bloomberg Intelligence. “Internet stocks rallied in anticipation of better times to come, with hopes pinned on the potential upside from re-opening and more benign regulatory environment. However, this did not lead to a change in the earnings outlook for most companies.”
Part of the issue is that spending after the country’s reopening hasn’t matched expectations. During the recent Golden Week holiday, booking volumes rose while spending remained lackluster. Investors are also worried about an uncertain economic outlook, especially after a surprise contraction in the manufacturing sector.
There is some pick up in activity, though. Gross merchandise value growth in China’s e-commerce industry accelerated to 11% in March after slowing to 5% in the first two months this year, according to estimates by Goldman Sachs Group Inc., which cited recovering demand and easing logistics disruptions. Still, the broker says Alibaba and JD.com’s growth are below the industry average.
Going forward, a return of risk appetite and material earnings upgrades are needed to spark the next leg of China’s tech rally, BI’s Lea said.
Others caution that the market’s momentum has now shifted away from tech into more popular trades, including a recent frenzy on financial shares thanks to their links to the government.
“The current earnings momentum is not very good and it will be hard to attract investors back to this sector when the other sectors like SOEs have much more attractive valuation and favorable policy support,” said Kenny Wen, head of investment strategy at KGI Asia Ltd.
Tech Chart of the Day
The S&P 500 Information Technology sector is nearing record levels relative to its parent benchmark index. Tech stocks have surged 22% this year as inflation cools and investors anticipate that the Federal Reserve will start cutting rates by year-end. That compares with the S&P 500’s more meager 7.3% advance.
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–With assistance from Subrat Patnaik and Michael Msika.
(Updates to add Tech Chart of the Day section.)
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