Investors are making a mistake by taking a short-term view of the political and regulatory risks in Chinese stocks, given the lessons from the US-China trade and tech war, according to a top regional tech money manager at JPMorgan Asset Management.
Those risks, amplified by tightening antitrust regulation of internet-platform operators and the tobacco industry, have contributed to a US$240 billion erosion in market value this year as the Hang Seng Tech Index and US-listed Chinese peers slumped by as much as 24 per cent.
Tencent Holdings, RLX Technology and other Chinese tech leaders suffered a thrashing last quarter, before rebounding in April. Alibaba Group Holding, the owner of this newspaper, has risen more than 7 per cent in a relief rally after paying a record US$2.8 billion fine.
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“The Chinese government’s track record confirms that they would like to see their leading, high tech, most innovative companies flourish rather than flounder,” Oliver Cox, who co-manages the US$1.14 billion Pacific Technology Fund, said in an interview. “The recent correction has only made those stocks with outstanding long-term growth prospects even more attractive.”
While cognisant of a broad range of political and regulatory risks, Cox’s fund has not had a good start to 2021, with a 0.24 per cent return to date, following an 82 per cent gain in 2020, according to Bloomberg data. Still, he draws confidence from the rebound in internet-related stocks since the US-China trade war erupted in 2018 during the Trump administration.
The spat later unfolded into a tech “cold war” with the blacklisting of Huawei Technologies and its units on the Entity List from May 2019 on national security concerns.
Still, investors who persevered with Chinese stocks have been richly rewarded as the sector more than clawed back initial losses. Tencent Holdings, for example, lost 23 per cent in 2018 at the outset of the trade war. It surged 80 per cent in the next two years to become Asia’s most valuable company at US$949 billion at its peak on January 25 this year.
Cox’s fund has prospered 111 per cent since May 2019 despite some initial wobbles, while the MSCI World Information Technology Index gained 84 per cent in the same period.
Regarding the US-China technology war, Cox said the “localisation” of research spending programmes to improve China’s ability to compete in areas like semiconductors is now proving to be beneficial to a range of companies inside and outside the country.
“This is a key reason why, as I think has been the case since 2018, viewing China-US tensions as negative for tech is the wrong approach and too simplistic,” he added.
While the Pacific Technology Fund is invested in American depositary shares of Chinese companies, Cox said it only favoured higher quality holdings in larger companies to mitigate the risk of them being kicked out of US exchanges because of auditing and compliance rules.
“The good news is that these larger, higher quality companies are continuing to seek to achieve dual listing status via listing in Hong Kong as well as in the US, if they don’t already have it,” he added. “My view is that if there is ‘delisting risk’ anywhere in the universe, then it is most likely in the smaller, less liquid, lower-quality names.”
The Pacific Technology Fund allocated 53 per cent of its money in China, 21 per cent in Japan and just under 10 per cent in South Korea, according to data published by fund tracker Morningstar. It owned stakes in Meituan, Kingsoft Corp, Tencent and Kingdee International Software among its top 10 holdings as of March 31.
Singapore-based Sea Ltd, Samsung Electronics, Lasertec Corp, SK Hynix, Recruit Holdings, and Taiwan Semiconductor Manufacturing Corp were also on the top list.
The fund’s 82 per cent gain in 2020 outstripped a 44 per cent advance in the MSCI World Information Technology Index. Over a five-year period, however, its annualised gain of 25.5 per cent trailed the index’s 28.4 per cent payback.
“As a long-only fund, we are much more focused on generating strong positive returns over the long term, rather than hedging short-term downside risks,” Cox said. “That’s why this fund has a strong bias towards the leading companies in the tech space, with the best growth prospects and therefore greatest share price upside potential.”
The fund invested in the Kuaishou Technology listing and continue to watch tech IPOs closely. Thematically, it sees the best opportunities in enterprise software, e-commerce, gaming and manufacturing leaders.
“Finding the next technology winners of the future is a key focus of our research,” Cox said, given a very diverse IPO pipeline around the region at the moment.
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