investment viewpoints

    3 reasons why we are positive on China tech stocks

    3 reasons why we are positive on China tech stocks
    Didier Rabattu - Head of Equities

    Didier Rabattu

    Head of Equities
    Odile Lange-Broussy - Co-Portfolio Manager

    Odile Lange-Broussy

    Co-Portfolio Manager
    June Chua - Portfolio Manager, Asian equities

    June Chua

    Portfolio Manager, Asian equities
    Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

    Pascal Menges

    Head of Equity Investment Process and Research, Client Portfolio Manager
    Henry Zhang - Portfolio Manager

    Henry Zhang

    Portfolio Manager

    Need to know

    •    Short-term volatility in China’s equity markets notwithstanding, we believe long-term drivers for China’s growth remain intact.
    •    Regulatory crackdowns have wiped considerable market value from technology companies, and forced ride-hailing firm Didi to de-list in the US, but the policy conditions are mostly priced in.
    •    Technology stocks have become more resilient, offering investors a chance to be a part of China’s long-term growth story at attractive valuations.

     

    From a regulatory crackdown on sectors such as education and tech in China to pandemic-driven supply-chain dislocations, China’s equity markets have sold off on short-term concerns. The latest selloff in tech stocks followed the news of Chinese ride hailing company Didi Chuxing’1 decision to delist from New York and switch to Hong Kong.

    The announcement, which comes against the backdrop of increased regulatory scrutiny in China, also had a ripple effect on Alibabaand Tencent3 stocks which tumbled along with Didi’s shares following the news.

    But amid this volatility, the long-term policy architecture and market forces for enduring growth persist – even in the embattled tech sector.

    That’s because the recent regulatory pressure and correction in tech stocks represent a bump on the long road ahead for Chinese growth, as planned in China’s dominant policy frameworks – the Five-Year Plan (2021-2025) and Vision 2035. Both champion greater tech R&D, artificial intelligence and quantum computing as part of an effort to grow the nation’s digital economy.

    We believe this overarching policy direction will foster greater transparency and competition, and modernise China’s regulatory oversight in line with Western economy standards. But this view is not reflected by current valuations in China tech stocks – presenting opportunities for forward-thinking investors, in our view.

    Now let’s unpack the drivers behind our long-term investment conviction in China’s tech sector.

     

    Sources

    1 2 3 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

     

    Looking ahead

    To conclude, we believe investors should stay focused on the big picture and not allow short-term volatility driven by modernising regulations and investor flight obscure long-term opportunities in China. In the nation’s tech sector, these prospects are being generated through by a combination of pro-growth policy flex and cheap valuations.

    Discover more about our China high-conviction strategy here.

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