MENTION Chinese tech stocks and you’ll see a number of investors – both retail and professional – expressing their utter frustration with the stock’s performance over the past year.
Chinese bulls widely believed in the exponential growth potential of Chinese tech companies due to the large domestic market and global expansion.
The advancement of innovation and creativity in the Chinese tech space is indeed unprecedented in recent times.
Tik Tok being a good example, is owned by ByteDance Ltd and showed how a product developed by a Chinese internet company can gain widespread acceptance around the world despite geopolitical tensions and the trade war between China and the United States.
This led many to believe in the promise of the “middle empire” to deliver the evergreen growth story.
The performance of KraneShares CSI China Internet ETF, which reflects listed Chinese Internet companies, speaks volumes.
To date, the index has fallen 64% from $83.51 (RM350.57) to $31 (RM130.14) within a year. It’s pretty much a meltdown in every sense of the word.
It also shows investor sentiment towards the sector. Many reasons have been given by experts and pundits, such as stricter regulatory measures taken by the Chinese government, the common prosperity program, record fines, social donations and even Jack Ma.
After the war between Ukraine and Russia, there were even growing fears that the Chinese stock market would end up like the Russian stock market once embroiled in geopolitical disputes, whether voluntarily or not.
The increase in the risk premium led to a massive valuation discount despite some names displaying great fundamental value. It all came down to feeling.
A recent report released by JP Morgan Asia Pacific Equity Research on March 14, 2022 showed how a 180 degree turnaround can occur not only in government policies but also in the investor fraternity.
The report downgraded the 28 Chinese tech stocks covered by its hedge to “neutral” and “underweight” as target prices for a number of companies were cut by more than 50%.
A key message from the report: there is no upside for Chinese tech stocks at least in the next six to 12 months. “Avoid” seems to be the strategy as analysts remained bearish on negative sentiment and technical indicators. Table 1 shows some of the stock price performance of notable Chinese internet companies over the past 12 months.
One of the main reasons that led to a sell-off in the Chinese stock market (not just in the tech sector) was the nagging fear of how China could potentially be targeted by the same kind of sanctions and boycotts that Russia is facing.
China has continued to practice its foreign diplomacy policy of non-interference in the internal affairs of other sovereign nations.
Apparently, maintaining a neutral position in the war between Ukraine and Russia is frowned upon by policymakers in the United States and its allies.
Allegations that China is supplying arms and supporting the war between Ukraine and Russia have even surfaced in the mainstream media despite the lack of concrete evidence to back them up.
It is a position adopted by Western countries and their allies when managing thorny geopolitical relations.
Trade warfare, sanctions, and economic isolation are emerging as a new form of “cold war” strategy when it comes to punishing or deterring those who are against Western ideologies.
This is a very fine line to walk for countries that have their own thorny internal and regional issues to resolve without becoming an economic risk to the country itself.
Naturally, investors would then become aware of this inherent risk and would discount heavily when looking at markets that might become a target country.
Do the fundamentals still matter?
It’s a question many have asked when looking at Chinese tech and internet companies. In terms of valuation, there is no doubt that these companies are undervalued, especially compared to their US peers.
Even in the JP Morgan report, analysts did not deny that their downgrade has little to do with fundamental valuation but rather due to fear of fund outflows and capital allocations in the near future for the funds. with a global mandate.
In their own words, “We strongly believe that stock prices are determined by fundamentals over a long period of time and that stock price movements driven by sentimental and technical factors tend to be corrected by fundamental developments over time. long term.”
At least there is a consensus within the investor fraternity that China’s tech sector has fundamentals. The main point of contention remains the short-term investment horizon and expected trading activity for the coming year.
As an avid fundamentalist, I know the stock market is often irrational. There is no other way to overcome irrationality than to lengthen your investment horizon. If one wants to take a position in Chinese tech stocks while they are selling frantically (many stocks have plunged 10% for three straight trading days), believing that time is your best ally can help allay some fears. .
Another approach would be to scale your entry and buy in separate increments instead of going big at a particular price point hoping for the lowest. For those unable to withstand such volatility, staying away may be a safer bet in the short term.
Geopolitical risk and tensions will always be part of the investment considerations, no matter what market investors look to.
Even developed economies like the United States, United Kingdom or Japan have had their own problems throughout history. In the case of the Chinese economy, it is important to remember that it is a different type of governance structure than the West. While many have argued that China practices somewhat social capitalism, the core of Chinese governance remains primarily communist rule.
The well-being of the people and national pride take precedence over the prosperity of a few elites. The economic benefits must trickle down to people, whether in the form of jobs, household income, a healthy work culture, or a lower cost of living.
To think that the Chinese government will continue to punish the tech sector for excesses resulting from growth over the years (many billionaires have been hit overnight due to the massive influx of foreign investment into the sectors) is a misunderstanding.
China’s ultimate goal is to be self-sufficient, independent while achieving technological progress.
They too understand that the government will need the help of the private sector. Regulatory changes are simply a necessary evil to address the gaps and social ills in the economy after two decades of growth-oriented policies.
However, if the country’s technology sector is attacked by foreign investors, I humbly believe that the Chinese government will do everything in its power to support the sector, and this also extends to the capital markets.
Ng Zhu Hann is the CEO of Tradeview Capital. He is also a lawyer and author of “Once Upon A Time In Bursa”. The opinions expressed here are those of the author.