China Technology, Internet ETFs Are Losing Momentum

The rally in Chinese technology stocks and sector-related exchange traded funds is losing momentum as strict lockdown measures in response to a zero-tolerance Covid-19 policy could weigh on revenue growth.

Over the past month, the Invesco China Technology ETF (NYSEArca: CQQQ) declined 5.5%, and the KraneShares CSI China Internet Fund (NasdaqGM: KWEB) rose 2.4%, while the broader Xtrackers CSI 300 China A-Shares ETF (ASHR) fell 3.3%.

Chinese markets have rebounded from their mid-March lows, but they have stuck within range over the past few weeks as anti-pandemic measures threaten to weigh on consumer demand. The overall caution on China’s macro outlook has also weighed on the technology segment, which makes up a large portion of the offshore market, the Wall Street Journal reports.

Dwyfor Evans, head of the macro strategy for the Asia-Pacific region at State Street Global Markets, warned that foreign interest in Chinese shares is weak, partially due to the recent spate of regulatory concerns and weak growth outlook.

“It is too early to go back into Chinese stocks until we see some clarity around regulations and until we see an improvement in earnings outlook. Both of those, frankly, are going to take some time,” Evans told the WSJ.

Earnings expectations have contracted due to slower sales growth. Analysts have even cut share-price targets ahead of the weaker outlook.

Meanwhile, Beijing’s strongarm approach to wrangle Covid-19 back under control, including lockdown measures in Shanghai and other major cities, has introduced new hurdles to the economic outlook.

For instance, Meituan’s chief executive, Wang Xing, recently warned investors that strict pandemic restrictions materially hurt the company’s main business during March.

In an increasingly consumption-focused economy, China’s internet companies rely on the domestic consumer’s willingness to spend on discretionary goods, according to Eva Lee, head of Greater China equities at UBS’s chief investment office.

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