(Bloomberg) — Manuel Muehl urged investors to sell Chinese tech stocks last summer when almost all of his peers called for buys.
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Nine months and about $1 trillion in lost market value later, the 30-year-old analyst at DZ Bank AG warns of further pain as China’s slowing economy and uncertain regulatory environment scare global investors away.
Muehl, whose Frankfurt-based office underscores its underdog status, was the first of more than 70 analysts followed by Bloomberg to issue a bearish view of China’s tech sector in July. His recommendations for US-listed JD.com Inc. and Alibaba Group Holding Ltd. were more accurate than any of his peers over the past 12 months, as shares have fallen 30% and 58%, respectively, since his call.
“We saw all these overhanging risks and felt like pretty much nobody in the market gave it enough credit,” Muehl said in an interview this month, citing Beijing’s ongoing crackdown on the tech industry. “Nobody knows what the actual risk premium for Chinese equities is right now as the market is still in a price discovery process.”
China’s strict adherence to a Covid-zero policy and the country’s darkening economic outlook have only strengthened this belief.
“You have a very difficult macro situation — the real estate sector, which is clearly in massive trouble, and big cities that are going into full lockdown,” he said. “All of these things are really hurting consumer confidence.”
hammered
The Hang Seng Tech Index of Chinese tech stocks has fallen more than 60% from a February 2021 peak, prompted by Beijing’s crackdown on private companies in everything from education to online gaming. The relentless sell-off that has wiped out a $1 trillion market value of index members since Muehl’s call in July has left some money managers questioning whether the tech sector is even investable.
The story goes on
Still, the majority of Wall Street analysts remain unimpressed. They cited longer-term potential, the upside of anticipated policy stimulus and relatively cheap valuations.
For example, the average 12-month target price for U.S.-listed Alibaba is $162.94, up more than 89% from Thursday’s close. Muehl’s latest target is $100. Its track record may offer some clues as to how things might play out: Bloomberg data shows that the stock would have returned 39% over the past year on its recommendation.
Muehl, who worked for two German financial firms before joining DZ Bank in 2019, remains bearish even after tech stocks staged a brief rally last month as policymakers vowed to end the sector review and stabilize capital markets . He added that the possible delisting of Chinese companies from US stock exchanges due to audit disputes remains “a very realistic risk”.
sell call
He saw little upside for the company’s fundamentals in the coming quarters. This comes as the ongoing crackdown and a challenging macro environment are driving Alibaba and Tencent Holdings Ltd. prompted it to report the slowest quarterly sales growth on record.
The consequences of such an infrequent call can be severe. In March, JPMorgan Chase & Co. – one of the few other brokers with a sell equivalent rating – rated the sector as “uninvestable”. Bloomberg News reported last week that the Wall Street bank, the top underwriter for a Hong Kong tech company’s listing, was removed after it lowered its price target.
DZ Bank was relatively unscathed as it has no capital markets business in Hong Kong.
Referring to the changes that would make him take a positive view of the industry, Muehl said he wanted to see a credible and sustainable shift in regulatory policy, rather than “adding new rules every two weeks.”
“You have to put an end to this negative news flow and have a positive news flow,” he said. “Right now we don’t have any of that.”
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