WILL Chinese technology stocks shine in an environment that is likely to be less hostile towards China? Will the current technology powerhouses monopolise all the key growth industries? Do we dare to make the audacious claim that China will supersede the US within the next decade as the world's largest economy, driven by its strategy to stimulate domestic investments?
Regulatory pressure, but digitalisation to continue
The recent US presidential election generated much controversy and uncertainty. This led to volatile trading in most high-growth stocks in November and there was clear rotation into cyclical and value stocks.
As a result, technology stocks fell as seen from the 4 per cent decline as at Nov 19 for the NYSE FANG+ Index, from a mid-November high. The index, however, is still a clear outperformer this year having clocked up a 79 per cent gain year-to-date.
The market also got excited about news from Pfizer and BioNtech whose Covid-19 vaccines are shown to be effective in preventing symptomatic infections. This has diverted interest away from technology companies.
Joe Biden as the President-elect is generally perceived as a positive, especially in combating and controlling the Covid-19 crisis. For the broader market, we expect this to be favourable as the world heads into a gradual economic recovery, aided by a persistently low-rate environment. The recent steepening of the yield curve also indicates longer-term optimism, that is, economic recovery.
However, US-China tensions are not expected to go away and will remain a lingering concern. In addition, anti-trust pressure is also likely to persist, hampering the growth of big technology companies. Regulatory pressure is unlikely to abate, especially in areas such as data access.
The strong push for digitalisation globally is irreversible and should be conducive for technology companies in the longer run.
Regulatory risks remain one of the biggest challenges and we expect the impact to be uneven for different segments of the technology sector.
Similar anti-trust concern in China
Over in China, the State Administration for Market Regulation (SAMR) recently released a draft soliciting public feedback on anti-trust guidelines against monopolistic practices in the Internet industry.
The development has dampened near-term market sentiment, especially for major Internet players. While the draft regulations are comprehensive, the key unknown is the degree of regulatory enforcement.
Dual circulation to drive investments
Will China overtake the US as the big tech powerhouse? This notion is not that far-fetched especially if one considers China's ambitious push for its new development strategy, "dual circulation", which relies less on global integration and more on expanding domestic commerce.
Innovation and technology development are key pillars of "dual circulation" that will drive China's long-term sustainable growth.
With the ongoing trade tensions, there is an urgency for China to seek diversified supplies of high-tech products. China is likely to boost its R&D expenditure as a percentage of its GDP.
Recently, China also unveiled 40 more measures to support Shenzhen as it is a key region to lead China's innovation push. This aims to strengthen China's self-reliance, especially in view of the decoupling of US-China technology and economies, which has created great uncertainty in terms of demand for China's products and goods.
While this will, at first glance, primarily benefit the domestic infrastructure, construction, manufacturing and industrial sectors, it will also spill over to other infrastructural support and services such as investments in areas that will advance the digitalisation of the economy.
The potential beneficiaries will widen to include industries working on 5G applications, data centres, Internet services, artificial intelligence, Internet of Things, among others.
High tech adoption rate is here to stay
The Covid-19 pandemic has also accelerated the global adoption rate for technology in all forms, from heightened demand for semiconductor to online shopping. Individuals and companies have pivoted during this period and adapted to new ways of procuring goods and services, both for the individuals and companies.
The rapid adoption of new and innovative ways of facilitating business activities and conducting business transactions is here to stay.
ADRs seeking secondary listings
Following the US Bill that requires greater oversight of foreign companies listed on its exchanges, including inspection of a company's audits for three consecutive years, there is increased urgency for American depositary receipts, or ADRs, to seek secondary listing in other exchanges and minimise the risks of delisting. So far, several ADRs have secured secondary listing on the Hong Kong Exchange including Alibaba Group Holding Ltd, JD.com Inc, NetEase Inc and GDS Holdings Ltd.
We expect this trend to gather pace, as more secondary listings, especially of big capitalisation growth companies, will enhance the breadth and depth of the Hong Kong Exchange.
Listing pipeline of new economy companies
Besides the mega secondary listings of ADRs, the outperformance of several key regional technology stock indices is also conducive for other privately held startups and new economy companies to seek listing. This will potentially include Bytedance, Toutiao, Didi, Kuaishou, DJI Innovations and many other technology-focused companies.
The recently launched technology-focused Hang Seng Tech Index (launched in July 2020), is up 70 per cent, far surpassing the performance of the broader benchmark Hang Seng Index which is down 6 per cent for the year.
Interest in high-growth technology stocks is strong, and this extends from e-commerce to cloud computing. Gains are seen in different markets, with the Nasdaq Composite Index up 33 per cent, the ChiNext Index up 48 per cent and the Shenzhen Stock Exchange Composite Index (which has a higher percentage of small and medium-sized enterprises in high technology industry) up 32 per cent.
Riding out current uncertainty
Despite recent developments, technology stocks are still largely up for the year. We continue to be constructive on the secular longer-term digitalisation trends.
Key risks include regulatory changes, higher corporate taxes and on-going US-China tensions. We continue to favour companies that can ride the secular long-term growth trends.
Companies with resilient balance sheets and stable businesses that can benefit from long-term economic recovery are also favourable.
While value and cyclical stocks have lagged growth stocks this year, there is renewed interest now as Covid-19 concerns subside. Technology stocks should still form part of a diversified equity portfolio.
The current volatility and price weakness present an opportunity to gradually increase exposure to selected technology stocks with strong double-digit earnings growth and at valuations which are near or below historical averages.
- The writer is head of OCBC Investment Research
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