Chinese techs lead US rivals for a spell

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 Sohu.com 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 Sohu.com, 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.