08 August 2021
What this chart shows
This week we look at the recent underperformance of Chinese technology, or technology-enabled, stocks. The chart shows US dollar returns for three equity indexes: MSCI China, MSCI China Tech 100 and FANG+. The FANG+ index represents the performance of 8 mega cap US growth stocks, though note the Chinese tech companies Alibaba and Baidu are also included, constituting 17% of this index. 16th February marked the peak for Chinese tech stocks this year and here we chart returns since then to July end.
At the trough this cohort of 100 stocks (MSCI China Tech 100) had fallen a massive 40% from the peak, pulling the broader Chinese market lower too, given the top 10 stocks in the Tech 100 index account for over 40% of the MSCI China index. Whilst US tech also struggled during the latter stages of Q1 (the reflation/reopening trade remained in full swing until the quarter end), it has proved much more resilient over the period, and the performance gap that has opened up exceeds 33% over the period; quite amazing for companies operating in the same sector, albeit in different regions. If one was to strip out Alibaba and Baidu from the FANG+ index it would be even greater.
Why this chart is relevant
The reason for this stark divergence is the Chinese government’s regulatory crackdown on a variety of tech companies, from the well-known beast that is Alibaba, to food delivery platform Meituan and more recently the ride-hailing (think Uber or Lyft) company Didi Chuxing, among others. Didi IPO’d in the US on 30th June, just before the regulator came knocking and the share price fell over 40% at one point. Pressure from regulators has centred on issues ranging from antitrust investigations to usage of personal data. In July the regulator announced companies with data for more than 1 million users would be subject to a review before listing overseas.
The recent crackdown potentially highlights two key points: first that the Chinese government evidently wishes to enforce greater control in an economy which has become increasingly tech dominated; and second that they might not be overly keen on international (Western) financing of these companies during a time of political uncertainty between the US and China. How deep and wide the Chinese authorities wish to probe poses a risk for investors and it might be some time before we see the end of these pressures.
Source: Bloomberg Finance L.P., Momentum Global Investment Management Research Date: August 2021
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