While U.S. tech stocks' leadership is impressive, performance of China's tech sector is truly spectacular, led by well-known names such as Alibaba Group Holding Ltd. (BABA), Baidu Inc. (BIDU), and JD.com Inc. (JD), CNBC reports. For the year-to-date through August 7, the MSCI China Information Technology Index, which includes these companies, has gained 56%, more than double the 23% rise in the S&P 500 technology sector over the same period, per CNBC.
Big gainers among Chinese tech stocks during this time frame include Momo Inc. (MOMO), up 150%; JD.com (JD), up 87%; Alibaba Group, up 81%; and Baidu (BIDU), up 38%, per CNBC. Momo is a mobile-based social networking provider, while the other three are primarily online merchants. As a point of comparison, year-to-date gains through August 7 among the FAANG stocks were: Facebook Inc. (FB), 49%; Apple Inc. (AAPL), 38%; Amazon.com Inc. (AMZN), 32%; Netflix Inc. (NFLX), 46%; and Google parent Alphabet Inc. (GOOGL), 19%.
The North Korea Factor
These China techs have seemed as invincible to evil forces as the mythological Chinese dragon, which sympolizes potent and auspicious powers over typhoons and other forces of nature. But now, escalating tensions between North Korea and the U.S. are worrying investors, sending stock markets in Asia and around the globe down moderately on Wednesday. On Thursday, the Shanghai Composite Index fell 0.42%, and the Hang Seng Index was down 1.2% shortly before the market close in Hong Kong, per CNN Money. (For more, see also: Trump's "Fire and Fury" Warning Hits Stocks, Lifts Swiss Franc and Gold.)
The reaction of investors in the iShares MSCI China ETF (MCHI) has been relatively muted so far. Nonetheless, if tensions worsen, and especially if China is drawn into the a Korean conflict, Chinese tech stocks could be under severe selling pressure.
Rising Affluence in China
But even a modest pullback can't conceal strong secular trends driving the China techs that are as powerful, if not more powerful, than those driving the FAANGs. "The big takeaway here is China's a rising, affluent economy. We're seeing a complete rise of the consumer based on e-commerce," is how David Russell, a senior manager at online broker E*TRADE Financial Corp. (ETFC) summarized the Chinese tech stock boom to CNBC. Online shopping is 13.8% of all retail sales in China, versus 8.5% in the U.S., CNBC says, adding that the recent growth rates in online sales were 28.6% in China and 14.7% in the U.S. Hence the heavy presence of ecommerce companies among China's big tech stock gainers. "U.S. investors are starting to notice these companies," Russell told CNBC.
Smaller, More Volatile
The smaller market capitalizations of the leading Chinese tech stocks means that they can run further, according to analysts cited by CNBC. For example, while Amazon.com is valued at about $478 billion and Alphabet at about $648 billion, Alibaba is just under $400 billion and Baidu is at only $79 billion, CNBC says. The downside is that smaller market caps theoretically mean that they can lose value more quickly.
Indeed, CNBC warns that Chinese tech stocks tend to be more volatile than their U.S. counterparts, partly because they operate in a political and regulatory climate beset by sudden government investigations and rule changes. In June, Chinese social media stocks fell on a surprise government announcement that video services from Weibo Corp. (WB) would be shut down for lack of proper licenses. In 2016, Baidu was hit with an investigation into its advertising practices.
So investors should be prepared. While Chinese tech stocks are high-flyers, higher-than-average turbulence goes with the ride.