(Reuters) – Individual traders have been jumping in to buy stocks discarded by big investors during the sell-off triggered by China’s regulatory crackdown, research showed on Wednesday.
Vanda, an independent research house, said its data showed subdued retail trader activity earlier in the week, but just as fears of contagion from China spilled over to Wall Street, “the dip-buying army” reappeared.
Vanda’s data is tracked globally but U.S.-based traders likely comprise the biggest chunk of it.
Meanwhile, flows in China-focused exchange traded funds tracked by JP Morgan showed that while institutions have recently been sellers of Chinese stocks, “retail investors appear to have behaved in a contrarian fashion by seeing this week’s dip in Chinese stocks as buying opportunity,” the firm’s analysts said in a report released Wednesday.
Retail investors’ buying may help to stabilise U.S.-listed Chinese shares after several days of selling driven by Beijing’s move to tighten regulations on the technology and education sectors.
The Nasdaq Golden Dragon China benchmark of tech stocks was up more than 9% on Wednesday after four days of falls.
Graphic: Golden dragon index – https://fingfx.thomsonreuters.com/gfx/mkt/zgvomwanwvd/dragon.PNG
Vanda said U.S.-listed shares of three Chinese companies — electric vehicle makers Nio and Xpeng, and tech giant Alibaba — were among the six biggest bought stocks by U.S. retail investors on Tuesday, attracting net inflows worth a combined $194 million.
Those shares have fallen between 12% and 17% at their lowest point this week compared with Friday’s close.
Overall, stocks impacted by the regulatory crackdown had seen combined retail inflows of $239 million, roughly 14% of total retail purchases on the day, Vanda said.
Retail traders have shot to prominence this year after big bets on heavily shorted stocks such as video game retailer GameStop or cinema chain AMC, driving huge rallies in relatively obscure shares and heaped losses on several big-name hedge funds.
But the buying of newly cheap Chinese shares implies a shift in the retail traders’ behaviour, Vanda analysts Ben Onatibia and Giacomo Pierantoni noted.
“From driving triple-digit returns in high multiple stocks, they have turned into dip buyers in underperforming ones,” they told clients.
“Financials, energy and reopening are a few of the sectors where they’ve cushioned institutional selling.”
Still, JP Morgan’s analysts believe there may be more pain for Chinese equities, despite the recent bounce.
“While retail investors and momentum trades … might provide some near-term relief to Chinese equities, other institutional position and flow indicators look rather problematic for Chinese equities over the medium term.”
Households are the biggest investors in the United States and own 37% of the equity market, according to data published by Barclays. Research has also shown that U.S. stimulus checks to households have found their way into the equity market.
Reddit, popular with day traders for stock tips, contained discussions on the Chinese share slump, with comments from a few interested buyers.
But mainstream investors are likely to remain cautious in the face of greater regulatory uncertainty.
“The de-rating of tech stocks is here to stay for some time. I don’t expect multiples to go up anytime soon,” said Gael Combes, head of fundamental research equities at Unigestion.
(Reporting by Danilo Masoni in MILAN; additional reporting by Medha Singh in BENGALURU and Ira Iosebashvili in New York; Editing by Sujata Rao, Aurora Ellis and Alison Williams)
