Alibaba Stock and Others Fall After New Chinese Scrutiny. Why the Worst May Be Over.

China’s State Administration for Market Regulation said Saturday that it had fined the three companies, among others, for breaching antitrust law by failing to declare deals as far back as 2012. The competition regulator imposed a fine of 500,000 Chinese yuan ($78,000) for each of the 43 cases listed in its investigation.

These fines mark only the latest installment in a series of crackdowns by Beijing against the country’s technology sector, which has lasted much of this year. Pressure has also fallen on Chinese for-profit education and real estate groups, as President Xi Jinping tightens his grip over the country’s economy.

Also read:As China Changes, Investors Can Still Win. 13 Picks From Our International Roundtable.

The moves by China’s regulators have spooked investors, helping the MSCI China index decline by 13% this year—compared with a 27% rise for the U.S. S&P 500 index and a 17% surge in the MSCI All Country World Index.

Fears around the future of Chinese tech have also been wider in scope than just regulatory pressures. E-commerce giant Alibaba recently reported slowing quarterly growth, pushing the stock down more than 15% last week and adding to macro concerns about the world’s second-largest economy.

But the worst may be over.

“While individual stocks may require a specific catalyst, as a sector Chinese tech may now be past the worst, in our view,” said a team led by Mark Haefele, UBS Global Wealth Management’s chief investment officer, in a report Monday.

The group at the Swiss bank said that it looks like the market is pricing in a lot of negatives—and there may be an overcorrection at hand. While noting that new policy measures could impact earnings, the analysts still expect profits to grow around 15% to 20% over the next two to three years

The group at UBS expects the market to gradually position for a projected earnings rebound in the second half of next year, and forecasts midteen upside overall for the MSCI China index.

Haefele’s team also brushed aside concerns over a macro slowdown in China. 

It said negative updates from companies—such as Alibaba, which signaled deteriorating market conditions—are likely to fade along with Covid-19 outbreaks, weak consumer sentiment, and higher input costs due to inflation and supply-chain issues.

The group at UBS also predicts that volatility from regulation is likely at an end, saying that the current round of regulatory tightening has outlasted prior episodes.

“There has been little in the way of unexpected, major measures this quarter, and the policy focus appears to have moved on to implementation,” Haefele’s team said, noting the wave of smaller fines that hit Alibaba and others over the weekend. 

“We think valuations have overcorrected, and the sector is close to an inflection point,” the team added.

Write to Jack Denton at [email protected]