A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., March 4, 2020. REUTERS/Brendan McDermid
Reuters
  • US tech stocks stand to gain from China's increased regulatory scrutiny on Didi and others.
  • The regulatory crackdown represents "a major black eye" for the Chinese tech sector, Wedbush said in a note on Friday.
  • As investors rotate out of China and into US tech stocks, the Nasdaq could surge 10% into year-end, according to Wedbush.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

China's increased regulatory crackdown on stocks like Didi and Alibaba will drive a major rotation out of China tech stocks and into US tech stocks, Wedbush analyst Dan Ives said in a note on Friday.

Ives sees the Nasdaq surging 10% to 16,000 by year-end, driven by a "nirvana set up" for mega-cap tech stocks as growth stories continue to unfold as part of the "$2 trillion digital transformation," Ives explained.

In recent weeks, ongoing regulatory scrutiny has hampered Chinese tech companies, with Didi falling to a post-IPO low on Friday as Beijing considers unprecedented penalties on the ride-hailing company. Meanwhile, Alibaba and Tencent have faced increased anti-monopoly scrutiny from China, while the Ant Group was forced to abruptly shelve its highly anticipated IPO late last year.

"The recent Didi IPO and massive regulatory scrutiny out of left field from Beijing has been a major black eye for the Chinese tech sector," Ives said. "We believe these dynamics will yet again bode well for US tech stocks as the favorable backdrop and rotation away from Chinese tech into US tech creates a 'nirvana set up' for FAANG names and the tech sector into the next 6 to 9 months," Ives added.

China's crackdown extended to education stocks on Friday, with TAL Education, New Oriental, and Techedu all falling more than 50% on a report that China is considering making Chinese tutoring companies non-profits.

Given the out-of-nowhere regulatory scrutiny from China, investors will have a hard time buying Chinese tech stocks as a "major X variable" could be right around the corner at anytime, which is hard for investors to digest, Ives said.

"[This] has ultimately been and continues to be a major deterrent around owning Chinese tech names and speaks to their underperformance so far this year," Ives said.

Of the mega-cap tech stocks Wedbush recommends owning, Apple remains their favorite, while Microsoft should be front and center for investors thanks to their cloud exposure. Both names traded near record highs on Friday.

Read more: BANK OF AMERICA: Buy these 26 small and mid-size stocks now to take advantage when they beat Wall Street's expectations for the second quarter

Read the original article on Business Insider