How China Impacts Tech Stocks, and Why They’ll Rise in 2015

Several U.S.-based companies can expect to gain China's cool-off

Microsoft Corporation (MSFT) and other tech stocks got a big lift 11 months ago after the Chinese government ended a nearly 14-year ban on video game consoles, including Microsoft’s Xbox.

How China Impacts Tech Stocks, and Why They’ll Rise in 2015

The day of that announcement marked a major turnaround for Microsoft shares. The stock has gained 38% since then, underscoring the argument that what happens in China can seriously help or harm tech stocks.

Another example of this phenomenon is Cisco Systems, Inc. (CSCO), whose shares declined 15% within weeks of last year’s Chinese government decision to target the network supplier’s gear for alleged security threats. Since then, though, the allegations have faded and Cisco shares have risen 35%.

Investors have good reason to assume this “China effect” for tech stocks will continue in 2015. It’s thus reasonable to bet that tech stocks such as Microsoft, Cisco, Qualcomm, Inc. (QCOM) and International Business Machines Corp. (IBM) will rise in 2015 precisely because of what’s going on in the Chinese market.

What’s going on? It’s widely assumed that China’s cooling economy will continue to slow next year, perhaps at an even faster rate. And this cool-off is likely to make it harder for the government to negatively impact tech stocks with business-disrupting decrees such as the Xbox ban, or by upsetting global powerhouses such as Cisco.

In recent years, government decisions have already done a lot of damage to U.S. tech suppliers in the Chinese market. In addition to alleging misdeeds by Cisco and banning video game consoles, China last May barred Microsoft’s Windows 8 operating system from new government computers. It’s also recently ordered a phase-out of IBM servers at banks and leveled anti-trust charges against Qualcomm.

Meanwhile, Chinese tech stocks have been soaring over the past year on expectations that the companies would profit from all that bad news for the Americans. The blow against Windows 8 was a particularly hefty boost for companies listed on the Shanghai and Shenzhen stock exchanges last spring, according to the Chinese brokerage Northeast Securities.

Among Shenzhen listings over the past year, shares in the smart-card systems supplier New Capec have risen 252%, while Jin Choi Technology stock has climbed 215% and shares in Shiji Information — a hotel information systems builder partly owned by Alibaba Group Holding Ltd (BABA) — have increased 95%. Shanghai-listed Beijing Teamsun Technology Co., Ltd., shares rose 303% and Gold Card Technology gained 313% over the past year. The price-to-earnings ratio for Chinese tech companies has risen in tandem with share values, and currently averages 78.

Looking ahead to 2015, however, analysts say Chinese tech stocks could face a correction. Northeast Securities called share values overall “too high.” Analysts at Ping An Securities agree that the coming year will mark a “value contraction” for Chinese tech stocks, although they remain bullish on Internet banking and financial services providers.

American, European and Japanese tech companies are in a good position to benefit from the rise of Chinese tech companies, as the latter look beyond the cooling Chinese economy for opportunities to sell products overseas, often through tie-ups with global brands. The Chinese government is encouraging this business abroad.

Japanese railways, shipping companies and utilities are already clients of the Chinese mapping information services company Chaotu Software, which is pushing for more global business. Chaotu’s Shenzhen stock price has more than doubled over the past year. And many of the world’s best-known hotel chains are Shiji customers.

But a better reason for investors to get behind American tech stocks in 2015 is that the China effect is now working in favor of companies such as Microsoft and Cisco. They survived Chinese government hits, licked their wounds and moved on.

There is of course no way to know for certain whether the Chinese government might target another U.S. tech company in the future. But major action looks increasingly unlikely as the economy cools. And those U.S. tech stocks that fell on bad news from China proved they can rebound nicely.

As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.

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