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Advisors know that many clients love domestic tech stocks and that some of the mega-cap members of the communication services and tech sectors have ways of drawing the ire of politicians on both sides of the aisle.
To date, the political pressure behemoth tech companies in the U.S. amounts to no more than typical Capitol Hill grandstanding and dog and pony shows. In China, well let's just say when Beijing wants to wield regulatory scrutiny, it can do so with an iron fist. Just look at the recent performance some well-known internet stocks, including Alibaba (NYSE:BABA), and the broader Chinese technology sector.
As of May 7, the MSCI China Information Technology 10/50 Index is off 12.37% year-to-date while residing almost 25% below its 52-week high. That's the definition of a bear market and then some.
On the surface, those are unappealing data points and they're enough to perhaps make clients squeamish about embracing Chinese tech. However, the world's second-largest economy is abound with compelling sector opportunities that make for credible satellite positions within client portfolios. Indeed, there are reasons to view the Beijing-induced pullback in Chinese tech stocks as a potential buying opportunity.
Domestic Focus Matters
China is home to a vibrant technology sector, rivaled only by that found in the U.S. That's notable because Chinese tech firms are highly dependent on imports, something Beijing is working diligently to change.
“For years, China has focused on moving its industries up the global value chain, including the development of a robust domestic Information Technology (IT) sector,” according to Global X research. “China’s supportive government policies, along with its massive domestic market of 1bn internet users and 882mn smartphone users have given domestic IT firms room to flourish.”
The 5G boom coupled with a fast-growing e-commerce market and rapid advancements in disruptive fields, such as artificial intelligence (AI) and healthcare innovation, accentuate not only the importance of China's domestic tech drive, but potential benefits for clients, too.
“China policymakers are determined to drive domestic technology advancement and innovation via investment. According to the fourteenth 5-year plan (2021-2025) released in early March, China aims to ramp up technology across various areas and increase research and development spending by 7% annually over the next five years to the end of 2025,” notes FTSE Russell.
Another trait that makes Chinese tech appealing is, that like its U.S. counterpart, the sector has depth. Today, there are over 100 publicly traded Chinese large- and mid-cap names in the tech space hailing from seven industries.
“In fact, one can find fast-growing technology companies across the whole value chain—from upstream to downstream, hardware to software, cloud to infrastructure,” notes FTSE. “Perhaps even more compelling is the fact that the growth of these homegrown companies is well-supported by a domestic market of 1.4 billion consumers.”
Secular Trend Afoot?
Predictably, Chinese tech stocks are more volatile than the broader market, but, over the past three years, capped benchmarks of Chinese tech fare rewarded investors that could handle the turbulence with significantly higher returns than broad market indexes.
Returns seduce, but there are fundamental reasons why discussing some China tech exposure with clients is a valid conversation and those reasons extend beyond basic international diversification.
“The demand for China tech is likely a start of a secular trend—rather than a tactical allocation,” notes FTSE Russell. “The signals are clear: China is well on its way to becoming a global technology powerhouse. This well-supported, diversified set of innovators now represents a space that investors shall no longer ignore.”
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