These Chinese tech stocks are even hotter than FANG

Key Points
  • The MSCI China Information Technology Index has more than doubled the S&P 500 technology sector's 23 percent climb this year.
  • Analysts attributed the Chinese stocks' outperformance to improving economic growth, especially in China's e-commerce business.
  • U.S. options traders' interest in Chinese tech stocks also has grown, according to E-Trade data.
These Chinese tech stocks are even hotter than FANG
These Chinese tech stocks are even hotter than FANG

As much as U.S. technology stocks have climbed this year, their Chinese counterparts have surged far more as investors are drawn to the world's second-largest economy.

Among the big Chinese tech stocks traded in the U.S., messaging app Momo, e-commerce site and its bigger rival Alibaba have each gained nearly 80 percent or more this year, far more than Facebook, which is up 49 percent as the best-performing of the U.S. FANG stocks.

"Tech has been an outperformer this year. Global has been an outperformer this year. Chinese tech stocks combine those two themes," said David Russell, senior manager at online broker E-Trade.

FANG refers to Facebook,, Netflix and Google parent Alphabet, the group of stocks whose dramatic surge has dominated the U.S. stock market's gains. This year, U.S. tech stocks overall remain market leaders, up 23 percent as the best-performing sector in the S&P 500.

However, the MSCI China Information Technology Index has more than doubled that performance — soaring 56 percent this year in terms of Chinese yuan.

"The big takeaway here is China's a rising, affluent economy," Russell said. "We're seeing a complete rise of the consumer based on e-commerce."

Online shopping is a much bigger business in China than the U.S., and growing faster.

Chinese online sales of physical goods leaped 28.6 percent in the first half of the year, to 2.37 trillion yuan ($350 billion), increasing their share of China's total retail sales to 13.8 percent from 11.6 percent in the first half of 2016, according to official Chinese reports.

In contrast, U.S. e-commerce sales grew 14.7 percent, to $105.7 billion in the first quarter, accounting for 8.5 percent of total retail sales, according to the latest data from the U.S. Department of Commerce.

Given the growth opportunity, Chinese tech giants such as Alibaba and Baidu are "becoming more internationally recognized," said Peter Donisanu, global research analyst at the Wells Fargo Investment Institute.

He said that attention is attracting "investors who want to get in on the ground on the next GM, the next Apple … the next multinational that's about to break out."

U.S. investors are also getting more sophisticated in how they play the Chinese tech stock trade.

E-Trade's Russell found that options volume jumped in the last month for five of the largest Chinese tech stocks.

Options give traders the right, but not the obligation, to buy or sell a stock. A call option is the right to acquire a stock in the future at a preset price. A put option is the right to sell.

"We're seeing not only increased volume in Alibaba, Baidu and some of the other names, we're seeing it very much dominated by upside call activity" indicating expectations for price gains, Russell said.

"U.S. investors are starting to notice these companies," he said.

For example, the average daily options volume for from June 27 to 30 was 25,606, according to E-Trade data of U.S. options markets. That jumped to an average 41,632 last week.

Traders bought 16,000 to 54,000 of call options on JD each day last week, in contrast to between 6,500 and 13,000 for put options, according to E-Trade.

Chinese tech stocks can run further, analysts said, since their market capitalization is smaller than their U.S. counterparts.

Alibaba's market cap is just under $400 billion, versus's $478 billion. Baidu's market cap is far smaller at $79 billion and a fraction of Alphabet's $648 billion.

To be sure, Chinese tech stocks tend to be volatile and remain vulnerable to sudden government investigations or regulation changes.

In June, shares of Weibo and other Chinese social media stocks dropped after the State Administration of Press, Publication, Radio, Film and Television said it would shut down Weibo's video services because it didn't have proper licenses. Separately, a government investigation into Baidu's advertising practices coincided with a sharp drop in profits in the second quarter of 2016.

However, Baidu recovered from that slump and reported in late July that this year's second-quarter profit jumped 83.5 percent from the prior year, to 4.41 billion yuan.

Of the four other Chinese tech stocks with high options volume, NetEase is scheduled to release quarterly results on Wednesday, JD on Aug. 14, Alibaba on Aug. 17 and Momo on Aug. 22.