Chinese and U.S. tech stocks have been rallying so far this year, but players in China are expected to fare better than their U.S. counterparts, and it’s all thanks to diversification.
JPMorgan Asset Management chief Asia market strategist Tai Hui told Barron’s that publicly traded technology companies in the U.S. are more vulnerable to a pullback largely because they haven’t branched into other business like the Chinese ones have. Expanding into other areas cushions the blow if a core market declines.
“If you look at the BAT [stocks], you have them not only doing social media and advertising, but they’ve stretched into the sphere of finance, asset management and logistics,” said the analyst. “The Chinese technology ecosystem is much more capable of monetizing its platforms compared to some of the U.S. counterparts.” BAT refers to Baidu (BIDU), Alibaba (BABA) and Tencent.
In the U.S. there are the FANG stocks, which are Facebook (FB), Apple (AAPL), Netflix (NFLX) and Alphabet’s (GOOG) Google. Hui said they aren’t diversifying enough beyond their core markets, which puts them at a disadvantage. He noted that strong earnings expectations for the four could be hard to meet and result in a selloff in U.S. tech stocks. (See more: Alibaba Aims to Become World’s Fifth Largest Economy by 2036)
For some time now, Alibaba, Baidu and Tencent have been pushing into new markets as their core markets become more saturated. Alibaba, the leading ecommerce company in China, has been focusing its efforts on linking producers in the U.S. with Chinese consumers, building its cloud computing offering and pushing digital payments with its Alipay unit. Baidu and Tencent are also branching into new markets with Tencent recently expanding its WeChat pay service into Europe. Baidu just inked a deal with Nvidia (NVDA), the graphics chipmaker, to partner on artificial intelligence.
Facebook, Apple, Netflix and Google are also in a bunch of markets but tend to operate in areas they know best. Facebook, for example, hasn’t moved too far beyond social media, while Apple is working on new products and services but still emphasizes its iPhone and computer businesses. (See more: Tencent’s WeChat Takes on Alibaba in Europe)
To say tech stocks have rallied so far this year would be an understatement. In the U.S., Facebook is up more than 37%, while Apple is trading more than 25% higher and Netflix is up roughly the same. Meanwhile, Google’s shares have appreciated 20% since the beginning of 2017. As for Chinese tech stocks, Alibaba is up close to 70% in 2017, while Baidu is trading 10% higher. The surge in the shares and an improving economy has also led to higher earnings expectations that Hui thinks puts U.S. tech stocks at risk. The analyst noted that seasonality in China could result in a decline in Asian stocks in the next couple of months, which could present a buying opportunity.