Chinese techs lead U.S. rivals for a spell

Trade drama played out on Wall Street among U.S. and Chinese technology firms.


Trade drama played out on Wall Street among U.S. and Chinese technology firms.

Chinese techs on top

Wall Street shares mostly held on to a second session of gains as positive sentiment from less-severe-than-feared tariffs was sustained. With Treasury yields back in focus though, there were standout losers. Generally, higher-yielding ‘value’ names outperform the ‘momentum’ and ‘growth’ side (which pays lower yields) when bond optics look this compelling. But another aspect of U.S. equity trading was also in focus. There was a Chinese flavour to the day’s top technology performers. The snapshot below is not a complete list but shows familiar names pacing technology shares listed across U.S. markets.

Figure 1 – Select U.S./U.S.-listed Chinese shares – 1851 BST, 19th September 201819 September 2018

Source: Thomson Reuters/City Index

Conversely, high-profile U.S. tech giants were anchoring the entire market. Amazon, Microsoft, Google and Apple were in the red. Other slightly ‘smaller’ names, like $164bn graphics chip maker Nvidia, were also limping earlier, before swinging higher as the session progressed. Big Tech losers, which have a strong consumer-facing profile, have been scrutinised in recent weeks as investors weigh potential revenue pain, should the trade fight turn uglier. If it does, restrictions on U.S. firms doing business in China can’t be ruled out. Supply chain deterioration is another risk, with Apple, in particular, in the frame.

Alibaba down 9% this year

Either way, the chance that a sustained shift of investor interest in favour of Chinese big techs has begun, to the detriment of U.S. rivals, is slim. A short-lived opportunistic rotation is a better probability. Earlier, we noted that the relatively relaxed reaction to this week’s tariff news has limits. We expect these to become more evident as FX markets resume challenging the yuan and with further U.S.-Sino escalation difficult to avoid. Furthermore, a fair chunk of the Chinese groups noted above have been dragged lower this year along with Shanghai and Shenzhen stock markets. For instance, sprawling e-commerce leader Alibaba was last down 9.2% for the year, though doing way better than web services group which is more than 50% underwater relative to its IPO earlier in 2018. Even Las Vegas’s hotel and Casino operator Wynn Resorts is on a losing streak, partly due to all-in exposure to China via the gambling region of Macau. Conversely, high-profile U.S. technology risers outweigh fallers this year, continuing to help Nasdaq indices drive Wall Street, despite recent trials.

China techs set to end 2018 lower

Corrective bounces are inevitable, and Wednesday’s is unlikely to be the last for high-profile Chinese shares in the near term. Further out, financial expectations will reassert their influence as differentiators of relative share price performance. Established groups like Alibaba, where current financial year revenues are still expected to grow more than 60%, will continue to see contained impact as trade relations deteriorate further. Weaker firms like, with forecast growth of 3%, lower than the rate at which revenue costs are growing—currently near 13%—face toughening conditions. More broadly, underperformance of major Chinese web enterprises relative to U.S. rivals is set to be a long-term fixture on Wall Street.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.