Chinese tech stocks - especially those listed in the US and Hong Kong - may have been subject to significant sell-off over the past few months, but cautious investors are now shifting their portfolio strategies to capture opportunities from the high-growth sector.
In 2021, the shareprice of big tech names like Alibaba and Tencent were hammered following a regulatory crackdown, with the Nasdaq OMX China Technology index losing as much as 27% in 2021. However, investors are now hoping that the worst is over and that tech stocks could be turning the corner.
“We believe China is ‘on sale’, with opportunities in both value stocks and (for the first time in a while) growth stocks too," said Jonathan Pines, head of Asia ex Japan at the international business of asset manager Federated Hermes.
China, he said, now trades at a multi-decade discount relative to the rest of the world,
“It doesn't mean that it's going to go up 20% this year, but if you use any reasonable horizon (three to five years), we believe it will outperform,” he told AsianInvestor.
While some investors have said Chinese stocks have become untenable due aggressive policy moves by the Chinese government, the US-based asset manager doesn’t believe that this represents the full picture.
“We recently added to Baidu which has got caught up in the recent ADR and policy-angst sell off, but is an example of a company where investors have turned negative on the stock that has a Hong Kong secondary listing and that is not, in fact, in the crosshairs of ‘common prosperity’,” Pines said referring to Xi Jinping's policy of balancing financial growth and social stability.
Federated Hermes also initiated a position in Tencent, a stock that the house has held back from buying for over a decade because of its valuation.
“We also have added to JD.com on weakness which is our favourite e-commerce play and has invested heavily in distribution to improve the customer experience, which we expect to result in market share and margin gains,” he continued.
To balance these positions, the asset manager has been progressively cutting its holdings in India as that market is now considered by them to be too expensive despite many good companies and a good top-down outlook.
The Hang Seng Index capped 2021 with a 14% drop, its steepest loss in a decade, according to Bloomberg data, where bearish bets have been heavy against Chinese tech stocks since last year.
Even though Chinese regulatory risk is never far from investors' minds, the impact of central government policies is expected to be less than it was last year.
“China understands the benefits capital markets have brought to the country over the past few decades, and has acted (even very recently) in ways that demonstrate a continuing commitment to capital markets,” Pines said, noting that the one risk in the country is the rising tensions with the West.
“It might be less predictable, but for now we don't for now see tensions dramatically escalating because of a recognition on both sides of the huge economic interdependence.”
Other asset managers have also indicated that they are shifting to a more positive strategy on China tech stocks.
Brian Arcese, portfolio manager & equity analyst at Foord Asset Management - a South Africa-headquartered fund manager - told AsianInvestor it launched an Asia ex Japan Fund six months ago which, while still at the seed stage, was positioned to capture investment opportunities in the region especially China.
“We see US markets and a lot of the underlying securities being quite expensive. Asian markets, in particular China, are quite inexpensive and in addition to the divergent sectors and cheaper valuations,” Arcese said.
“I think last year is kind of a good case in point in that the regulatory environment in China was quite a bit of an overhang. Performance was obviously challenged during that period of time," he said. "But, if you're building a diversified portfolio, with a foreseeable rebounding in the market, the longer-term performance will stand and outperform.”
According to its latest fund portfolio as of December 2021, Tencent was its second-largest share holding at 4.7% with JD. com just behind on 4.1%.