Chinese stocks experienced a significant decline on Friday, continuing the losses seen throughout the week. The drop was attributed to a lack of new drivers following a strong upward trend. The Hang Seng China Enterprises Index fell by up to 2.7%, marking its most considerable two-day decrease since November 12. The technology sector, which had been driving market growth all year, saw the most significant downturn. Leading tech companies like Xiaomi Corp. and Alibaba Group Holding Ltd. each saw losses exceeding 2.5%. On the mainland, the CSI 300 Index also dropped by 1.5%.
Concerns about a potential market correction have been raised, with BofA Securities warning of an imminent significant downturn. Analysts at Morgan Stanley have also predicted increased volatility, noting a decline in investor sentiment on the mainland. This caution comes amid the market factoring in the positive outcomes from the National People’s Congress earlier in the month, which included commitments to support economic growth and artificial intelligence development.
Although tech company earnings have generally been positive, market reactions have varied as high expectations were already built into stock prices. The current market rally has pushed valuations above historical norms, with the Hang Seng China index trading at 10 times forward earnings estimates compared to the five-year average of 8.5.
Pressure to take profits from Hong Kong-listed tech stocks has increased following the release of their earnings reports, according to Alvin Ngan, an analyst at Zhongtai Financial International Ltd. The narrowing valuation gap between Chinese and US tech stocks, caused by a correction in US stocks, is also a factor driving this trend.
Morgan Stanley strategists led by Laura Wang noted a decrease in onshore investor sentiment over the past week, as reflected in reduced trading volumes. They anticipate volatility during the current earnings season.
Even though the Hang Seng Tech Index fell over 3% on Friday, it remained up around 26% for the year. Meituan's share price dipped ahead of its earnings report scheduled for Friday, while BYD Co. experienced over an 8% decline in Hong Kong before its upcoming results next week.
The upcoming week holds the possibility of providing fresh guidance for investors as several key companies, including major banks and consumer firms in China, are set to report their earnings.