It’s Official: Hedge Funds Hate Chinese Tech Stocks

  • Posted by on September 2nd, 2015 at 9:22 pm

Even following a frenzied sell-off during the past several weeks, investors continue to grow more weary about China.

The Shanghai composite index has already fell 40% from it’s peak and could drop even further as investors remain nervous regarding China’s economic prospects.

No sector has felt the brunt of this sell off more than Chinese tech stocks.  The chart below illustrates just how precipitously Chinese tech stocks have dropped in the past several months.

CQQQ is an ETF that consists of the largest Chinese tech companies (Tencent, Alibaba, Baidu, Netease, Lenovo, Qihoo, and others).



As you can see from the chart, shares of this ETF have declined by a staggering 34.3% in the past three months compared to a 7.71% drop in the S&P 500 index.

Not even blue chip Chinese tech stocks are being spared from this widespread sell off.

According to a recent analysis from S&P Capital IQ that analyzes aggregate buying/selling data of top hedge funds, Chinese search provider Baidu ($BIDU) was the most sold stock in the quarter.

It looks like this draw down may continue, as widespread pessimism about the Chinese economy continues to dominate the markets.

The fact that even blue-chip stocks like Baidu are being sold-off speaks to just how rapid investor’s confidence in China has deteriorated.

As you can see from the chart below, in terms of valuation, shares of Baidu have reached a new low-water mark.  Despite their rapid revenue growth and virtual monopoly over the coveted Chinese search market, shares of BIDU are valued closely to slower-growth rival Google.  Shares of tech darling Facebook have roughly 2X the multiple of BIDU.



Given how markets tend to operate cyclically, it’s unlikely that shares of BIDU will remain at this bargain-basement valuation for long.

Personally, I would recommend staying clear of Chinese tech stocks until investor confidence in the Chinese economy is restored.

However, if you are a total contrarian, you might view this as a buying opportunity of the lifetime.  China has potential to become the largest economy in the world sooner than later.  If that comes to fruition, it’s a safe bet that large tech companies like Baidu and Alibaba will be driving forces of the Chinese economy.