The risk is rising and the opportunity is falling?

Technology stocks, once bullish, suffered a sell-off between February and May of 2021. The total market capitalization of the 30 constituent stocks in Hong Kong's Hang Seng Technology Index has lost about HK $5.4359 trillion since February 18, 2021.

In the past, public offering funds, which went crazy to the south to buy technology stocks, once fell into a situation of floating losses. Among them, Huaxia Global Select had the largest retracement, with the largest decline of more than 31% during the period. By the end of the first quarter, the fund's top 11 heavy stocks were all technology stocks, accounting for nearly 40% of the fund's net asset value.

After the dark hour, signs of improvement are emerging. After a correction in some technology giants, the risk of high valuations has been released. Hong Kong's Hang Seng Technology Index has clearly stabilized since bottoming out on May 14, rebounding by more than 8%. Recently, JPMorgan Chase & Co Asset Management believes that the decline in Asian technology stocks is mainly due to falling valuations, rather than other factors, the sell-off is unlikely to continue, and many investors still have a very strong mentality of buying technology stocks on the bargain.

Is the "sell-off" of technology stocks over?

Since February 18, 2021, global technology stocks seem to have entered a "cold winter", falling endlessly, and several important technology stock indexes in Asia have entered a bear market or are on the brink of a bear market after successive declines.

Among them, Hong Kong's Hang Seng Technology Index peaked and fell to 7433.44 points at one point, more than 30 per cent from its high in February. It is generally believed that the stock index has fallen more than 20% from its recent high to be regarded as entering a technical bear market. According to this view, the Hang Seng Technology Index has already entered a technical bear market.

However, since bottoming out on May 14, the index has stabilized, continuously pulling up and entering the horizontal shock phase, with a cumulative rebound of more than 8 per cent. It means that there are already high risk-averse bottoming funds are trying to lay out some of the oversold technology stocks.

As far as individual stocks are concerned, New Oriental Education & Technology Group online has fallen the most since February 18, 2021, with more than 63%. In addition, the maximum retracement of Meituan, Kuaishou Technology and Alibaba Health Information Technology is more than 40%. BABA Hong Kong shares, Tencent and JD.com also had a maximum pullback of more than 20%.

Among them, Meituan is the fifth largest company in Hong Kong by market capitalization, after Tencent, BABA, Industrial and Commercial Bank of China and China Merchants Bank. On the eve of this round, Meituan's total market capitalization was as high as HK $2.52 trillion, but by the close of June 18, the total market capitalization had fallen to HK $1.84 trillion, a cumulative loss of about HK $680 billion.

In addition, as the absolute leader of the Hong Kong stock technology sector, Tencent and BABA have also fallen by 20.2% and 22.5% respectively since February 18. The total market capitalization of the 30 constituent stocks in Hong Kong's Hang Seng Technology Index has lost about HK $5.4359 trillion since February 18, 2021, according to Wind.

On the eve of the slump, "first Brother Public offering" went on a buying spree on Meituan.

From January to February 2021, mainland funds set off a southward wave, frantically sweeping technology stocks. The daily net inflow of southbound funds from the Shanghai-Shenzhen-Hong Kong Stock Connect once exceeded HK $26 billion, with a cumulative southward inflow of HK $385.55 billion during the period. "across Hong Kong, snatching pricing power" once became the hottest topic.

Among them, public offering institutions went south to snap up technology stocks with the most enthusiasm, with Tencent and Meituan becoming the most sought-after two technology stocks.

By the end of the first quarter, Tencent had become the third largest and the first largest Hong Kong stock in public offering funds, with as many as 516 funds holding a total of 211.28 million shares, an increase of 78.13 million shares from the end of the previous quarter.

In addition, Meituan is allocated to the heavy stocks of as many as 201 public offering funds, with a total of 176.64 million shares, an increase of 29.33 million shares over the end of the last quarter. In terms of position market value, the market value of Meituan's position in Hong Kong stocks is second only to Tencent, making it the second largest Hong Kong stock market.

Among them, the "public offering" Zhang Kun in charge of Yi Fangda blue-chip selection of Meituan is particularly ferocious. By the end of the first quarter, the fund held 33.704 million shares of Meituan, an increase of 7.512 million shares from the beginning of the year, accounting for nearly 10% at one point. The fund also increased its position in Tencent by 2.58 million shares during the period.

As a result of the collapse of technology stocks, public offering funds with heavy holdings have naturally been hit hard. The net worth of some public funds has also retreated significantly since February 18, and some funds have even retreated by more than 30%. Among them, the largest withdrawal rate of the blue chip selection of Meituan and Tencent once reached 22.5%. With the recent stabilization and rebound of technology stocks and the sharp rise of liquor stocks, the net value of Yifangda blue chip selection rebounded by 8.5%.

In addition, among the equity public offering funds that can invest in the Shanghai, Shenzhen and Hong Kong markets, Huaxia Global Select has suffered the largest pullback, with the fund falling more than 31 per cent since February 18. By the end of the first quarter, the fund held all the top 11 heavy positions in technology stocks, accounting for nearly 40% of the fund's net asset value. the top three stocks were Tencent, Meituan and Tesla, Inc., respectively. They are all technology giants that have fallen significantly since February 18.

In addition, Jingshun Great Wall Jiying, headed by star fund manager Liu Yanchun, has seen its biggest decline since February 18, 2000. The fund's stock position at the end of the first quarter was as high as 97%, of which Hong Kong stocks accounted for 41% of net worth. Heavy stocks also include Tencent, Meituan and so on.

Can you still buy technology stocks after the pullback?

There has always been an anti-human law in the investment community: risks rise and opportunities fall out. In fact, the most fundamental reason for this round of sharp falls in technology stocks is that they have risen too high and their valuations are too high.

As we all know, the stock price = EPS × PE, so there are simply two factors that drive the stock price up: the growth of EPS's performance and the expansion of PE's valuation.

Take Meituan as an example, there has been no significant improvement in performance, user growth and market share since 2020, but the stock price has soared, with the highest increase of 556% during the period. Obviously, this round of stock price rally is mainly due to the expansion of PE's valuation. Once the market style changes, the marginal tightening of monetary policy, or changes in the policy regulatory environment, there will be a valuation-killing market, which is the reason why Meituan has been going down all the way.

The same logic also applies to technology stocks such as Tencent and BABA, so has it fallen out of the opportunity after this round of deep correction?

In fact, since mid-May, some funds have begun to attempt to copy the bottom of the Hong Kong market in the sharp pullback of technology stocks. Judging from the performance of Hong Kong's Hang Seng Technology Index, after bottoming out and rebounding, it began to show signs of stabilizing, and the tragic period of killing valuations may have passed.

Recently, JPMorgan Chase & Co Asset Management advised investors to buy adjusted Asian technology stocks. Kerry Craig, the company's global market strategist, said the previous decline was mainly due to falling valuations rather than other factors. He believes that the sell-off is unlikely to continue, after all, for many investors, there is still a very strong bargain-hunting mentality.

Andy Wong, senior multi-asset investment manager at Pictet Asset Management, said growth stocks had attractive value because concerns about inflation masked their excellent performance.

Take Tencent as an example. On May 20, Tencent released its results for the first quarter of 2021. During the reporting period, revenue was 135.3 billion yuan, an increase of 25% over the same period last year, which once again exceeded market expectations of 133.6 billion yuan. In terms of net profit, Tencent's net profit in the first quarter was 47.767 billion yuan, an increase of 65% over the same period last year, and the performance growth rate is still very stable. Performance growth coincided with a correction in the share price, Tencent's PE (TTM) has fallen to 27 times, almost at a 10-year low.

Andy Buden, investment director of Capital Group, believes that long-term trends support investor interest in technology stocks, and digitization has accelerated in the past year and will continue, while artificial intelligence and machine learning, autopilot and VR will be the main drivers of technology stock growth over time.

Other investors remain cautious about high-priced technology stocks, especially as the marginal monetary policy of global central banks tightens, rising global bond yields threaten valuations and a return to inflation is conducive to cyclical gains.

David Chao, global market strategist at Invesco Asia Pacific, said higher yields and discount rates put pressure on the valuations of growth stocks that rely on future earnings for high valuations. Although the price of Asian technology stocks has fallen and the price-to-earnings ratio of the Asian technology index for the next 12 months has fallen to 18 times, the average valuation is still higher than the historical average, with an average valuation of 14 times over the past decade.