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HONG KONG, July 12 (Reuters) – Rather than spur a relief rally in China’s battered tech sector, the past week’s developments at Jack Ma-founded Ant Group have merely reminded global investors of the fickle nature of the country’s regulatory policies and the fragility of the sector.

The initial market reaction when China announced a USD 984 million fine for the Alibaba Group affiliate for violating laws and regulations was one of relief, with many market watchers saying it signaled the end of a multi-year regulatory crackdown on the country’s technology sector.

But technology shares, including offshore-listed American depository receipts (ADRs), have barely rallied. Fund managers cite numerous reasons for steering clear of the sector, including stringent regulation in the future and a flagging domestic economy.

“In short, tech policy tightening may have come to an end but will remain tight going forward,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.

“The more accommodative regulatory conditions we saw in the past, which facilitated explosive growth across the platforms, have given way to higher levels of regulation and oversight which will likely mean more moderate growth in the mid to long term.”

Both the Hong Kong-listed shares of Alibaba and its ADRs are up more than 9% since Friday, when the fine was announced. But they still are trading at a third of their price levels in October 2020.

The KraneShares CSI China Internet ETF is up 5.4% since Friday, while back home the CSI Overseas China Internet Index is up nearly 3%.

Yet China tech valuations have been gutted in the nearly 3 years since Ant was forced to shelve its initial share offering, and fund managers see plenty of headwinds, apart from just policy scrutiny. Alibaba shares are traded at 11 times forecast earnings, while rival behemoth Amazon Inc. is at 59 times.

“The golden era for these internet companies is evidently over. They have entered a long winter of price competition and market consolidation, an adjustment that is not going to end in one or two years’ time,” says Wong Kok Hoi, founder and CIO of APS Asset Management, which is based in Singapore and manages around USD 2 billion.

Wong points to intense price competition and monopolistic behaviors as signs the business landscape had toughened. Meanwhile, there were new regulations and more could come.

“It is dangerous to assume that, after the imposition of the fine, Ant financial can now do what it likes,” he said. “Will regulators now ease on enforcement after the fine? Don’t believe so because this is not how regulators in any country work”.

NO DEMAND EITHER

Meanwhile, China’s shoppers are being more frugal even as borders reopened after the pandemic, weighing on demand for China’s fintech firms and online commercial platforms such as Alibaba and JD.com, so much so that some of them have stopped publishing the gross merchandising value (GMV) data they used to tout in the past.

Kai Kong Chay, Hong Kong-based senior portfolio manager for Greater China equities at Manulife Investment Management, says he is very selective in picking only services-focused companies with pricing power and penetration, given many others had no structural drivers left.

Derrick Irwin, portfolio manager for Allspring’s intrinsic emerging markets equity team, based in Boston, likewise believes regulatory tightening has ended but that didn’t mean a return to the regime preceding Chinese President Xi Jinping’s ‘common prosperity’ drive and to the lofty valuations then. Alibaba’s ADRs were at USD 315 then, compared to USD 90 this week.

“The government has learned that the private sector – particularly the tech sector – is a critical partner in jump-starting growth. The government will continue to exert pressure on key tech companies even as they allow growth to resume,” he said.

For some sell-side analysts, though, China tech has turned a corner.

Morgan Stanley, for instance, has Alibaba as their top pick among Chinese internet companies, with a target price of USD 150 which implies a more than 60% rise.

Min Lan Tan, head of chief investment office, UBS Global Wealth Management, APAC, based in Singapore, says most investors, particularly institutions and hedge funds, have been staying underweight on China.

“There is actually a lot of value in the internet space in China, and what is really needed is confidence that growth has stabilized,” she said.

(Writing by Vidya Ranganathan; Editing by Kim Coghill)

 

NEW YORK, July 12 (Reuters) – US stocks ended solidly higher on Wednesday, led by a gain of more than 1% in the Nasdaq after a report showed inflation subsided further with consumer prices registering their smallest annual increase in more than two years.

The data underscored expectations the Federal Reserve may let interest rates stand after one more 25 basis point hike expected at its July policy meeting.

Shares of big tech-related companies, which tend to be sensitive to higher interest rates, gave the S&P 500 its biggest boost.

In the 12 months through June, the CPI advanced 3.0%. That was the smallest year-on-year increase since March 2021 and followed a 4.0% rise in May.

While indexes ended off their highs of the session, “bulls remain firmly in charge,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

“Clearly the CPI data we got was what the bulls wanted to see, and those that have been sitting on the sidelines hoping for a pullback continue to get frustrated.”

According to preliminary data, the S&P 500 gained 33.40 points, or 0.75%, to end at 4,472.66 points, while the Nasdaq Composite gained 160.30 points, or 1.16%, to 13,921.00. The Dow Jones Industrial Average rose 92.17 points, or 0.27%, to 34,353.59.

Investors have been weighing how much longer the Fed will need to raise rates to curb inflation.

The CBOE Market Volatility Index, Wall Street’s fear gauge, eased.

The Labor Department report also showed the smallest monthly gain in underlying consumer prices since August 2021.

“The market is sensing the Fed getting closer and closer to that final one and done,” said Quincy Krosby, chief global strategist at LPL Financial in North Carolina.

The S&P 500 banks index rose. Reports from JPMorgan Chase JPM.N and other major US banks Friday unofficially begin the second-quarter earnings season.

Nvidia (NVDA) shares were up after the Financial Times reported that chip designer Arm is in talks to bring the megacap firm in as an anchor investor ahead of its planned listing.

US-listed shares of Chinese firms Alibaba Group (BABA) and Bilibili (BILI) also climbed amid hopes that China was easing its crackdown on the technology sector.

(Reporting by Caroline Valetkevitch; additional reporting by Johann M Cherian and Bansari Mayur Kamdar in Bengaluru; Additional Reporting by Shashwat Chauhan; Editing by Shinjini Ganguli, Nick Zieminski and David Gregorio)

 

NEW YORK, July 12 (Reuters) – As U.S. inflation cools and growth remains resilient, bullish investors are counting on the upcoming earnings season to provide more fuel for a rally that has taken stocks to their highest levels in months.

Wednesday’s closely-watched inflation report showed consumer prices increasing in June at their slowest annual pace since March 2021, stoking hopes that the Federal Reserve will soon end its monetary policy tightening.

Combined with a resilient labor market, the benign inflation data bolsters the hopes of those betting the economy is facing a so-called Goldilocks scenario of cooling inflation and steady growth that is seen as a positive backdrop for the rally in stocks. The S&P 500 is up 16.5% year-to-date and stands at its highest level since April 2022.

That optimism could be tested in the coming days as second-quarter earnings get underway. The rally has stretched the S&P 500’s valuations far above historic levels, raising the stakes for companies to report solid results in order to justify their share prices.

“The market is going to be really earnings sensitive here throughout the next few weeks,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “You’re seeing higher valuations. With that rally, I think there has been an increase in expectations.”

The S&P 500 trades at a forward price-to-earnings ratio of 19.2 times compared to its long-term average of 15.6, according to Refinitiv Datastream.

Reports heat up on Friday, including results from several major banks and UnitedHealth Group (UNH). Second-quarter earnings are expected to have dropped 6.4% from the year-ago period, according to Refinitiv data.

Stocks extended their year-to-date rally following the CPI report, with the S&P 500 last up 0.8% in afternoon trading. Treasury yields, which move inversely to bond prices, fell after the cooler CPI number fanned hopes that the Fed was done hiking rates.

“It is very clear that the back of inflation is broken and it’s now showing up in the data,” said Jamie Cox, managing partner at Harris Financial Group. “Markets are starting to come around to the conclusion that the rate hikes are behind us.”

Nevertheless, some investors are still keeping a wary eye on Treasury yields. Wednesday’s fall comes after a steady rise in yields in recent weeks, including a 60 basis point rise for the U.S. 10-year yield since early April.

The recent rise, however, largely stems from an improving economic outlook. That environment should also benefit stocks – as long as it’s validated by stronger corporate outlooks, investors said.

If company guidance is strong, “then you could see the stock market continue higher,” said King Lip, chief strategist at Baker Avenue Wealth Management.

“On the other hand, if the guidance and earnings growth outlook is less robust than the increase in rates, then you are probably, at least in the short term, topping out in stocks.”

Lip has been adding positions in transportation stocks, which he expects to benefit following upbeat economic data. He has pared back some large-cap tech holdings amid rising valuations.

To be sure, some investors believe the fallout from the Fed’s 500 basis points rate hikes since early last year has yet to be fully felt in the economy, and a downturn could still be in the cards.

Bryant VanCronkhite, senior equity portfolio manager at Allspring Global Investments, has been cautious on stocks that rely on economic growth, choosing to be overweight some defensive areas of the market, such as consumer staples.

“As we start to see companies’ reports, we will begin to get true data and evidence around which one of those camps is correct,” he said.

(Reporting by Lewis Krauskopf; additional reporting by Shristi Achar in Bengaluru; Editing by Ira Iosebashvili and Aurora Ellis)

July 11 (Reuters) – A “special rebalance” of the Nasdaq 100 index will take place later this month as exchange operator Nasdaq looks to reduce the concentration of heavyweight companies that account for nearly half of the index’s weight.

A blistering rally in growth and technology stocks has lifted the Nasdaq 100 index by 37.5% this year. That compares with a 14.8% gain for the benchmark S&P 500.

Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN), and Tesla (TSLA) combined account for 43.8% weight in the index, according to Refinitiv data as of Monday’s close. As part of the rebalance that will come down to 38.5%.

“There is some concern that this handful of names is distorting the health of the overall stock market, which is likely what’s spurring the special rebalancing,” said Art Hogan, chief market strategist at B Riley Wealth.

The adjustment will be based on shares outstanding as of July 3, with changes set to be announced on July 14 and taking effect before the market opens on July 24.

WHAT IS A SPECIAL REBALANCING?

A special rebalancing, which is part of Nasdaq 100’s methodology to maintain compliance with a US Securities and Exchange Commission rule on fund diversification, has taken place twice before, in 2011 and 1998, said Cameron Lilja, global head of index product and operations at Nasdaq.

The special rebalancing may be conducted at any time if the aggregate weight of companies, each having more than 4.5% weight in the index, tops 48%, according to Nasdaq. During the rebalancing, it is capped at 40%.

Microsoft has the largest weight at 12.91%, followed by Apple at 12.47%, Nvidia 7.04%, Amazon 6.89% and Tesla 4.50%, according to Refinitiv data.

A recent rally in Tesla’s shares pushed the aggregate weight above 48%, triggering the rebalance, Wells Fargo strategists said in a client note.

COULD THE S&P 500 FOLLOW SUIT?

Rebalancing of weights in the S&P 500 takes place when the aggregate of companies, with each having weight greater than 4.8%, exceeds 50% of the total index, according to S&P Dow Jones Indices.

Apple and Microsoft are the only two firms with weight over 4.5% in the S&P 500. The top five firms, with the most influence in the S&P 500 that also include Amazon, Nvidia, and Tesla, make up 22.2% of the index’s total market value.

An S&P spokesperson said that they “do not typically comment on other index providers’ actions and potential changes to our indices”.

WHICH STOCKS COULD SEE A BUMP IN WEIGHT?

Wells Fargo index strategists estimate Starbucks (SBUX), Mondelez (MDLZ), Booking Holdings (BKNG), Gilead Sciences (GILD), Intuitive Surgical (ISRG), Analog Devices (ADI) and Automatic Data Processing (ADP) will see their weight increase in the Nasdaq 100 index.

Meanwhile, Microsoft, Apple, Nvidia, Amazon, Tesla, Meta Platforms, and Alphabet’s influence in the index could reduce, according to the strategists.

“The smaller companies will end up representing a greater percentage of the entire index,” said Sam Stovall, chief investment strategist at CFRA Research.

“It will require portfolio managers to add to their positions in these companies, which will boost their share prices.”

PUTTING BRAKES ON MEGACAP RALLY

Apple, which touched USD 3 trillion in market capitalization late last month, fell 1% on Monday following the news. Other megacap stocks including Microsoft, Alphabet, and Amazon fell between 0.7% and 2.5%.

Changes to the index will force investment funds that track it to adjust their portfolios and sell shares of companies that have their weight in the index reduced.

A host of funds that track the Nasdaq 100, including popular exchange traded fund, the USD 200 billion Invesco QQQ ETF, are expected to be impacted by the rebalancing.

(Reporting by Sruthi Shankar, Medha Singh, and Bansari Mayur Kamdar in Bengaluru; Additional reporting by David Randall in New York; Editing by Shounak Dasgupta)