There's One Chinese Stock That Is Different From The Rest. Goldman Sachs Explores Why

Chinese tech stocks suffered a meltdown since many hit all-time highs in early 2021, with no significant improvement in 2022 compelling Goldman Sachs to at least take a new look at this sector, Barron's reports.

Alibaba Group Holding Limited BABA lost almost half its market value last year alone as China and U.S.'s regulatory crackdown weighed on the sector., Inc JDBaidu, Inc BIDU, and NetEase, Inc NTES were no better either.

The 2022 equity selloff amid red-hot inflation, surging bond yields, and recession concerns have only compounded investors' pain points.

Goldman expects market volatility to continue and isn't ruling out a recession within the following year. "We still think U.S. equities are the best place to be in terms of piloting through these treacherous waters," CIO Mossavar-Rahmani said at a media roundtable. 

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"Uncertainty is just so elevated, be it domestically from all the regulations or even abroad with the SEC auditing issue," Dibo said. "That said, we do think that this sector has got very beaten up."

Domestically, Alibaba and its peers battled rigid rules around data security and competition. Abroad, a rift over accounting rules between Chinese authorities and the SEC has raised the threat of forced delistings for U.S.-listed Chinese tech stocks. 

While there has been progress over auditing rules, it isn't a done deal, and this remains a significant tail risk. "There is a lot of bad news priced into this sector," said Dibo. "I think that the scope for disappointment going forward is much less."

Despite the latest quarterly earnings season revealing a painful financial hangover from China's disruptive Covid-19 lockdowns, tech companies still beat the Street's sales expectations and profit estimates.

Goldman will also be closely watching the auditing rules with the following National Congress of the Chinese Communist Party, another potential catalyst over new relevant announcements linked to the sector. The Singles Day e-commerce holiday in China could also be a deal maker or breaker, shifting the dial for the coming earnings season.

However, despite the spectacular growth, Goldman remains cautious about China as investors did not get rewarded for investing in Chinese equities.

Price Action: BABA shares traded lower by 0.14% at $86.31 on the last check Monday.

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