Fund managers are monitoring the US’s recent ban on certain Chinese tech investments to assess their potential impact on investment strategies in the tech sector and China-related opportunities, reports Piyasi Mitra.
The Biden administration
has issued an order to restrict specific investments in advanced technologies in China, including AI, quantum technology, semiconductors, and electronics. These rules will undergo a transparent process involving public notices and comments. The treasury department emphasised
that the US will remain open to investments, but the primary goal of this program is to safeguard national security by focusing on sensitive technologies. Fund managers are monitoring these developments to assess their potential impact on investment strategies in the tech sector and China-related opportunities.
Malcolm Dorson, senior portfolio manager and head of emerging market strategy at Global X ETFs, underscores that the rule will not come into effect until the following year and will not apply retroactively. Specific sectors like biotechnology would be excluded, and Dorson predicts that passive investments, publicly traded securities, index funds and other assets may be exempt from these restrictions.
"The order is expected to be limited to Chinese startups and larger firms that get over 50% of their revenue from the restricted sectors. Officials still have various details to debate and iron out," he says. Regardless, Chinese consumption remains promising, driven by a highly educated population and government investments in value-added technology. Dorson adds: "This would lead to higher-paying jobs and an expanding middle class. While China's urbanization rate is currently around 61%, it lags behind countries like the US, the UK, South Korea, and Japan, indicating further growth potential."
Government spending has "sustainability limits," says Dorson. China seeks to reduce its reliance on external factors as exports decline due to a shrinking manufacturing workforce. With private investment tied to business cycles, China looks to boost GDP growth mainly through private consumption. In the US, around 70% of GDP growth comes from private consumption, serving as a sustainable economic model. China, where private consumption accounts for roughly 38% of GDP, is learning and adopting this approach.
"Global diversification of operations is already happening due to geopolitical tensions and uncertain regulations. it’s a process that will undoubtedly have both winners and losers." Josh Snyder
Ramnivas Mundada, an analyst at Globaldata, cites that the ban has resulted in a sharp decline in Chinese tech stocks, testimony to their reliance on international funding, particularly from US venture capital. As of August 25, prominent technology companies experienced a notable decline in the last month, cites Mundada. Alibaba Group Holding Ltd. dropped by 7.7%; Baidu Inc. by 9.5%; Tencent Holdings Ltd by 6.8%, for example. According to Mundada, flexibility and proactive risk management are crucial as the investment landscape evolves. "The global ramifications could indirectly impact European and UK institutional investors, resulting in portfolio losses, higher volatility, and regulatory uncertainties. This necessitates quick risk management adjustments, including diversifying into other regions or sectors, such as US or European tech stocks."
Diversification is key
According to Josh Snyder, global investment strategist at GQG Partners, such restrictions tend to take many years to unfold and often have 'more holes than Swiss cheese.' Especially when the parties in question are the US and China, this type of headline volatility is not unique to technology, adds Snyder. For example, back in 2018, when the Trump administration, as part of the phase 1 trade deal with China, imposed commodity volume import 'quotas,' these targets were not even close to being filled nearly three years later.
Similarly, in the summer of 2019, the US government proposed a law that could remove Chinese firms from US exchanges if they didn't comply with auditing standards. According to Snyder: 'It had limited consequences. While some state-owned enterprises were delisted, there was no significant forced selling among major companies in the MSCI Emerging Markets Index. Therefore, selling Chinese stocks in the summer of 2019 wouldn't have been a wise choice for the next 12-20 months, as the MSCI China Index ended up outperforming the MSCI ACWI Index during that period.' Snyder also mentions that the Chinese now employ more Europeans than Americans in various enterprises because 'Europe tends to have a more sanguine view of China than the Americans do.'
Companies like TSMC are increasing their investments in the US, Intel plans to construct factories in Germany, and Apple, known for its frequent appearances in the news, recently manufactured its highest-ever number of iPhones in India. Global diversification of operations is already happening due to geopolitical tensions and uncertain regulations. It's a process that will undoubtedly have both winners and losers. We remain focused on preparation over prognostication,' he shares.
South Korea may benefit from tensions bubbling around manufacturing in Taiwan, but with increased capex, the US and Europe could also become beneficiaries. 'Even China may benefit in non-obvious ways, developing new trade relationships or even increasing its in-house technologies, even if, at the moment, they are quite a bit behind the US at the high end of the chip spectrum,' adds Snyder."
Enter chip stocks
According to Kunjal Gala, head of emerging markets at Federated Hermes, the more pertinent issue is Chinese access to critical American and European chip-making technology and the ability of the Chinese to progress in advanced semiconductor manufacturing.
"While the actions taken by the US might temporarily slow down this progress, China possesses the motivation, determination, and government support to ultimately achieve its goals in the medium term," adds Gala.
However, investment implications could be different from economic reality.
"The investability of Chinese chip stocks will depend on fundamental bottom-up drivers such as growth, margins, returns, and the sustainability of those metrics as chip making is notoriously difficult and capital-intensive. The semiconductor industry tends to be cyclical. However, Chinese chip stocks are likely to benefit from increased localization and import substitution."
An analysis by Eastspring Investments suggests that the China A-share market (shares of incorporated companies based in mainland China listed on the Shanghai or Shenzhen stock exchanges) is currently trading near its 'yearly lows.' Investors should remain agile in the short term while focusing on strategic sectors aligned with China's supply chain, energy, technology, and information security in the long term, recommended the asset managers, adding that it is 'optimistic' about high-end manufacturing and emerging industries like new energy, consumer services, healthcare, technology, and cybersecurity.
The macro may deteriorate, political posturing may continue, and the opportunity pool may shrink. As Snyder sums it up: 'There will always be a bullish market somewhere for those willing to seek them out."
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