China's tech giant is becoming a target for investors who are afraid to miss out

(Bloomberg) — What do you do when China’s booming markets offer investors a taste of the recovery they crave? Buy the country’s failing tech stocks.

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Big Tech is the most favored Chinese sector by institutional and retail respondents in the latest MLIV Pulse survey, with 42% of 244 investors also saying they plan to increase their exposure to the country in the coming year.

Chalk it up to a fear of missing out. The bigger the gap between a stock’s price and metrics like earnings and sales, the greater the potential for gains when good news lands, the logic goes. It comes this month amid signs that China may have begun to deviate from its Covid-Zero policy, as widely followed stocks such as Alibaba Group Holding Ltd. show intraday spikes of 20%.

There’s plenty of room to bounce back. The Hang Seng Tech Index and the Nasdaq Golden Dragon China Index of US-listed companies are down about 70% from their peak in February 2021. That’s worse than any of the 92 benchmarks tracked by Bloomberg. In September alone, funds sold $33 billion in Chinese tech stocks, according to a recent note from Morgan Stanley Quants.

To be clear, though, nothing fundamental has changed for the tech industry. There is little evidence that President Xi Jinping will reverse his campaign to rein in the country’s tech giants, and efforts to prevent the delisting of Chinese stocks from U.S. exchanges are progressing slowly. Lockdowns in key cities such as Guangzhou serve as a reminder that the determination to stamp out Covid-19 is still stifling consumption and battering the economy.

But when Chinese markets rally, they do so with gusto. Covering short positions and chasing momentum were the main drivers of the country’s shares over the past three weeks, with mainland-based investors also taking deals in Hong Kong. This is even as big names like Tiger Global Management throw in the towel on China and cut their allocations.

Chinese stocks and the yuan rose on Monday after the country’s financial regulators issued a 16-point directive to support the property industry, a sign that authorities are serious about tackling the crisis, a key drag on markets and economic growth.

It’s no surprise that the stock can be considered cheap. The Golden Dragon gauge trades at less than 15 times its members’ forward earnings, a 34% discount to its 10-year average. Investors will get more clarity on the health of corporate China in the coming weeks, as leaders such as Alibaba, JD.com Inc. and Pinduoduo Inc. should report the results.

Nearly half of market participants who responded to the survey expect U.S.-listed Chinese stocks to recover some of the losses by the end of the year. Less than a fifth of them saw declines that continued. Markets are underestimating the potential exit from Covid Zero, according to 48% of respondents. About 46% said markets were too enthusiastic about reopening.

Beijing’s virus containment policy is seen as the biggest potential catalyst for gains and the main risk for Chinese markets next year, underscoring how central it has become to the outlook. Goldman Sachs Group Inc. says a reopening would trigger a 20% rise in Chinese stocks.

In a potentially telling development, China last week eased quarantines for arriving passengers and removed a so-called circuit breaker system that penalizes airlines for bringing virus cases into the country. The new Politburo Standing Committee recently said that the country should stick to the Covid Zero policy, but that officials should also be more targeted with their restrictions.

High interest rates will be the main risk to international financial markets next year, according to most investors, followed by a slowdown in China. A global recession was also among the concerns cited by respondents.

MLIV Pulse is a weekly survey of Bloomberg Professional Service and website readers. The latest survey was conducted on November 7-11.

For more market analysis, check out MLIV’s blog. To subscribe and view previous MLIV Pulse stories, click here.

–With the assistance of Kasia Klimasinska.

(Updates with a TV clip under the fifth paragraph and trading on Monday in the seventh.)

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