By Nick Hedley
China’s battered technology sector has become a no-go zone
for many institutional investors, who believe the regulatory risks are now simply
too high. However, some money managers think the time is right to take
advantage of depressed valuations following a blistering sell-off.
Tech giants including Tencent, Alibaba and Meituan have seen
their share prices more than halve since early February 2021 due to a
far-reaching clampdown by regulators.
Investor sentiment started to falter when authorities pulled
the plug on Ant Group’s highly anticipated initial public offering (IPO) in
November 2020. This came shortly after the group’s founder, Jack Ma, accused regulators
of restricting innovation. Following his ill-fated speech, Ma disappeared from
the public eye for several months, and he has kept a low profile ever since.
Sentiment was further dented when authorities began to clamp
down on what they deemed to be monopolistic behavior in the tech sector, while
the likes of Tencent grappled with regulatory interventions aimed at preventing
online gaming addictions.
And after ride-hailing group DiDi listed in the U.S, Chinese
authorities launched a cybersecurity probe into the company and revealed plans
to tighten rules for corporates looking to raise capital offshore. Elsewhere in
the sector, edtech firms took a beating following a ban on for-profit tutoring
services.
The regulatory blitz might be nearing an end, but it has
done lasting damage to the sector’s ability to court offshore institutional investors.
But not all have been put off.
New York-based alternative asset manager Weiss
Multi-Strategy Advisers, which manages $4 billion in client assets as of
January, thinks concerns about regulatory risks are overblown.
Mike Edwards, deputy chief investment officer at Weiss,
says policymakers have made “a 180-degree turn” relative to a year ago, and are
acknowledging the sector’s critical role in the information revolution.
“It is this
policy and philosophical pivot that makes us constructive,” Edwards tells Markets
Group, adding that President Xi Jinping and his colleagues will need to boost
consumer and business confidence ahead of the 20th National Congress of the
Chinese Communist Party later this year.
Edwards also
believes it is “extremely unlikely” that global investors will have their
assets trapped in China if the country is labeled a “bad actor” alongside
Russia – a perceived risk that is a key deterrent for many institutions. China
has signalled its intention to avoid becoming involved in the war in Ukraine,
possibly due to the threat of sanctions.
That said, there is a risk that the U.S. and China may “weaponize”
financial flows, and this could mean forced delistings of depository receipts
and restrictions on outbound investment from the U.S.
“These are regular headline risks that any investor needs to
be aware of, and certainly there will be market turbulence as they manifest,”
Edwards says. However, most emerging Chinese tech companies are now listed in
their home country, while the vast majority of the legacy platform companies are
listed in both Hong Kong and the U.S. – meaning they will not be cut off from
capital markets.
“There is a lot priced in for these risks already, so I
don’t believe they are novel, nor should they be an impediment to a global
investor seeking China tech exposure.”
Nevertheless, most fund managers are unconvinced.
“I was
recently at a dinner with numerous CIOs of asset management firms in New York
and I was the only person at that table who responded affirmatively to ‘Is
China Tech Investable?’” Edwards says. “Far from being daunted by such a
contrarian view, I think that anecdote is supportive of the view that more than
all the bad news is in the price, from a positioning standpoint.”
Even though
many foreign investors will sit on the sidelines, valuations will likely
improve as regional investors and those wanting exposure to Greater China take
advantage of the over-correction, Edwards says.
Citi Global Wealth Investments is also warming to the idea.
In the second half of 2022, relaxed lockdown restrictions
and additional stimulus measures “could produce a strong rebound” in the Chinese
economy, according to a research report co-authored by David Bailin, CIO and
head of Citi Global Wealth Investments.
“Among the areas we find most attractive are those linked to
the economic reopening, green energy and technology more broadly,” Bailin says.
French asset manager Amundi says most of the bad news
concerning growth is already priced into Chinese equities.
“An economic rebound, coupled with more benign regulation, should pave
the way for a rebound in the second half,” Vincent
Mortier, Amundi’s CIO, wrote in a new research report.
Byron Lotter, a director at South Africa-based Vestact
Asset Management, says China’s tech sector is benefiting from approvals of
new video games and the conclusion of the investigation into DiDi – which has
meant the ride-hailing company is once again allowed to take on new users.
“Regulatory uncertainty is very problematic for shareholders, but not unprecedented in China. In 2018, Tencent took a big dive because game releases were blocked for months by the regulators who were worried about the impact of gaming on kids,” Lotter says. “It seems like things are settling down and heading in the right direction in China again. Let's hope sanity prevails.”
