China Tech Stocks Cap Best Winning Run in Five Years on Earnings Surprises, Fund Rotation

The Hang Seng Tech Index, which tracks major Chinese tech firms, has surged by 33% since the end of January 2025, marking its best winning streak in five years. This rally comes on the heels of a robust earnings season, with companies like Tencent Holdings Ltd. and Alibaba Group Holding Ltd. reporting better-than-expected profits. The strong earnings results, coupled with Beijing's easing of regulatory crackdowns, suggest that Chinese tech stocks may have bottomed out, drawing investors back to the sector.

Analysts have raised the forward-earnings estimates for the Hang Seng Tech Index to a three-year high, reflecting the improved profits and increased buybacks seen in the sector. The index is now trading at less than 17 times forward-earnings estimates, compared with its five-year average of 26 times and the Nasdaq 100's current valuation of 26 times.

Fund managers have been rotating their portfolios to capitalize on the trend, with many investors returning to the sector after years of regulatory crackdowns and slow economic growth. Some fund managers, such as Jian Shi Cortesi of GAM Investment Management, have cited the attractively low valuations and strong earnings growth of many Chinese tech companies as reasons for investing in the sector. Other investors, such as Michael Burry and David Tepper, have also initiated or increased their positions in Chinese tech stocks like Alibaba, Baidu, and JD.com.

The China tech sector, as measured by the KraneShares CSI China Internet ETF KWEB, now trades at steep discounts compared to its American counterparts, such as Alphabet Inc. and Amazon.com Inc. This has made Chinese tech stocks an attractive investment opportunity for many fund managers, who recognize the value to be had in them.



Despite the recent rally, Chinese tech stocks still face several challenges and risks, including regulatory risks, economic slowdown, geopolitical tensions, technological challenges, consumer sentiment, and debt levels. These factors could impact the sustainability of the rally in the Chinese tech sector by creating uncertainty, volatility, and potential downward pressure on stock prices.

In conclusion, the recent rally in Chinese tech stocks, driven by strong earnings results and fund rotation, has drawn investors back to the sector after years of regulatory crackdowns and slow economic growth. While challenges and risks remain, the attractively low valuations and strong earnings growth of many Chinese tech companies make the sector an attractive investment opportunity for fund managers. As investors continue to evaluate the long-term prospects of Chinese tech stocks, they should carefully consider the key risks and challenges facing the sector.