- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Investor uncertainty in China has been elevated over the past few years due to several factors, perhaps nowhere more so than in the tech sector. For some time, a combination of global and local policy factors has made the investment landscape complex.
However, recent developments, in particular China’s shift away from its zero-COVID policy, have reignited our confidence in the internet sector in China. While risks, of course, remain, we believe there are opportunities to be found among Chinese internet companies and prudent investors may be able to access them effectively with a diligent, bottom-up approach.
In our view, there have been three key risks weighing on Chinese internet companies: geopolitics, local policy, and slowing growth.
The geopolitical climate has proved challenging for tech companies in China. The Biden administration introduced additional restrictions in 2022 on semiconductor and semicap equipment sales to China. Progress in advanced tech, such as AI and autonomous vehicle development, is potentially impacted. My belief is that while domestic relative competitiveness will likely go unaffected, the restrictions may make it more challenging for Chinese companies to enter foreign markets — especially in areas that require high compute power, like cloud computing, a byproduct of being unable to access the most advanced hardware.
Recently, there has been progress between the Public Company Accounting Oversight Board (PCAOB) and China- and Hong Kong-headquartered public accounting firms, which suggests that avenues for cooperation remain. The PCAOB announced that it had secured complete access to inspect and investigate audit firms in China and Hong Kong — an incrementally positive development that also reduces the risk of delisting for Chinese technology ADRs.
That said, we don’t expect the geopolitical tension built up over the past few years to dissipate overnight, so foreign investors may think twice before buying Chinese stocks. There may be a future where ownership of China tech companies listed offshore shifts to local shareholders, but this would take time. Alternatively, companies could relist in the A-share market, but, in my view, this could also be challenging.
Aside from geopolitics, there are also local policy risks. On one hand, 2022 marked a focus on common prosperity as the government announced a shift toward a new model for economic development, However, policymakers are weighing support for the economy amid a reopening of borders and retirement of its zero-COVID policy.
While it would be prudent to presume that regulators remain vigilant, there is growing evidence to suggest that the regulatory cycle for Chinese tech companies has inflected to an easier environment. For example, recently a leading fintech company received approval to restructure parts of its business that were under scrutiny — a marked change after more than two years of headwinds.
While it might seem that regulatory winds have shifted, we believe that it pays to assess each tech subsector for vulnerabilities. Industries that are focused on entertainment like live streaming and short video, for example, could be more vulnerable than others that are deemed to contribute more strategic value. These industries could see unexpected, material risks appear unannounced, like they did last year in this sector.
Finally, we think there is also reason to be cautious about Chinese internet companies’ growth potential as an industry at this point. Penetration rates in the internet-services space have grown significantly. Competition generally remains high — although less cutthroat — with better rationalization. While there is room for growth ahead, it will most likely slow down compared to previous years. Investors will need to assess whether the growth profile of companies in this industry remains attractive enough to discount issues such as variable-interest entity (VIE) structures, policy impact, and geopolitics.
China’s reopening and economic recovery from its zero-COVID policy has bolstered our optimism about Chinese internet companies. Late last year, these companies’ stocks had very attractive valuations with strong balance sheets and expanding profitability, reflecting very low investor sentiment. At the time, we believed low valuations suggested that the market could reassess the multiples for certain businesses as investors turn more positive; companies were flush with cash and were returning capital to shareholders.
It’s early in the new year, but this reassessment is starting to play out and our outlook is more sanguine. The favorable backdrop of accelerated reopening, relative economic strength versus developed markets, and potential easing of regulations paired with attractive valuations may bode well for Chinese internet companies.
Potential government stimulus could make the investment case even more attractive. Starting off the year, a rising tide is thus far lifting many boats, but investors may wish to consider which areas of the market could benefit most from policy change. We’re most optimistic that e-commerce and local services may benefit from potential stimulus. Software companies could also be reasonably well positioned for longer-term growth and may benefit from domestic substitution.
It’s important to acknowledge that, when it comes to investing in Chinese internet companies, there are several potential sticking points to bear in mind over the longer term, but it’s also critical to acknowledge opportunities that exist as growth accelerates. Within this space, there are attractive companies that are exposed to potential stimulus or the reopening of the broader economy.
Taking a bottom-up approach, seeking out specific stocks with attractive valuations and setup, rather than taking broad-based exposure, is, we believe, the right strategy to navigate a volatile, but potentially opportunity-rich investment environment.
With so many nuances at play here, in our view, investors seeking exposure to China should remain nimble and may benefit from working with an active manager able to evaluate the complicated political and economic landscape holistically.
Featured unique perspectives
Equity investing with a thematic lens: Three game changers for 2023
Head of Investment Research Mary Pryshlak and Equity Portfolio Manager Tim Manning highlight their strongest convictions across global equity markets heading into 2023.
Reasons for optimism about Indian equities
Our experts explain why, despite criticisms that Indian equities trade at higher valuations today than they have historically, they may have the potential to help drive total returns over time.
Seven observations on the latest US/China executive order
Geopolitical Strategist Thomas Mucha shares his analysis of the recent Biden administration executive order, which aims to restrict investment into certain sectors in China, and details the potential investment implications.
Investing in the age of great-power competition
As competition between great powers intensifies, a new global order is taking shape. Geopolitical Strategist Thomas Mucha explores the investment implications of a more fragmented and fractious world.
Chinese equities: Pockets of strength for patient stock pickers
Portfolio manager Bo Meunier explores how China’s recovery may be more modest than headline numbers suggest and why, as a stock picker, she remains constructive.
Emerging markets health care: Ready for takeoff?
Global Industry Analyst Sue Su shares her sanguine outlook on the health care sector in emerging markets, especially in China, which represents the largest opportunity in this space.
EM evolution: New paths in equity portfolio construction
Multi-Asset Strategist Adam Berger offers a framework for structuring EM equity portfolios, with a focus on "EM 3.0" — differentiated active strategies that have less reference to cap-weighted benchmarks and may be more diversifying in a portfolio.
China equity in 2023: Year of the stock picker
Despite the potential risks of investing in China equity, Equity Portfolio Manager Bo Meunier believes there are attractive opportunities for patient, discerning stock pickers.
China’s economy: Poised to exceed expectations in 2023
With the bar set so low for China's economy, Macro Strategist Santiago Millan thinks it won't take much for an upside surprise in 2023.
China equity: Is today's investor pessimism overdone?
The short answer is yes, say Equity Portfolio Manager Niraj Bhagwat and Investment Director Philip Brooks, who believe China may offer a short-term buying opportunity.