Is the next big tech stock thing, Chinese tech stocks?

There’s some evidence that the money that has left big U.S. tech stocks such as Facebook (FB), Netflix (NFLX), Microsoft (MSFT) and Amazon (AMZN) on some recent days has been headed into big Chinese tech stocks such as Tencent Holdings (TCEHY), Alibaba (BABA), and Baidu (BIDU.)

You could find that pattern in evidence today when the Technology Select Sector SPDR ETF) was up 1.15% and the Invesco China Technology ETF (CQQQ) climbed 3.49%. Tencent gained 5.22%. Alibaba was ahead 2.52%. Baidu moved up 1.71%.

It’s not hard to find reasons for the possible rotation into big Chinese tech stocks. News that the United States and China will resume trade talks. The possibility of stimulus from the People’s Bank. A slight weakening in the U.S. dollar.

But probably the biggest reason is the extreme underperformance of the big Chinese tech stocks in 2018 to date. The shares lag their U.S. big technology peers by 40 percentage points in 2018. That has led to some rather stunning differences in valuation. For example, Tencent Holdings trades at 33.01 times trailing 12-month earnings per share. That’s by no means cheap. But then Amazon trades at 157.59 times trailing 12-month earnings per share. Want to argue that Alibaba is a more appropriate comparison with Amazon? Ok. Alibaba trades at 49.16 times trailing 12-month earnings per share. Or that Netflix is the closer comparison to Tencent. Well, Netflix trades at 167.11 times 12-month earnings per share.

If you’re the sort of investor who believes in paying up for extraordinary growth, it’s pretty clear where at least some of your money should go.

And you’d be right to point out that Tencent and Alibaba have a larger addressable core market than Amazon does.

Now I think I’d like to wait until I see the report on China’s retail sales due on Friday before jumping into bigger positions in any Chinese tech stock. (After all, I already own Alibaba in my Jubak Picks Portfolio and Alibaba and Tencent in my longer term 50 Stocks Portfolio.) And I’d love to get the leisure to see if growth at Tencent is going to bounce back after the second quarter’s disappointment. But I don’t want to wait too long–these stocks can be very volatile to the upside as well as to the downside.

A sustained recovery in China’s technology giants would also do wonders for emerging market indexes. The trio of Baidu, Alibaba, and Tencent account for roughly 10% of the MSCI emerging markets index. And right now the 21-day correlation between the Invest Technology ETF and the MSCI Emerging Markets Index is at the highest level in more than two years, according to Bloomberg