Compared to US tech stocks like Apple and Microsoft that are mainstays of global investment funds, interest in Chinese tech stocks and the tech IPO boom in China and Hong Kong has only just started.
“Tech companies that are already listed in the US have gathered a good number of followers. But before they were listed, a lot of them were not available to Mainland investors,” says Winnie Chiu, equities advisor at Indosuez Wealth Management’s markets, investments and structuring division.
In 2020, three of the top five exchanges by market value were in Greater China. These were the Hong Kong, Shanghai and Shenzhen bourses. The region also saw an acceleration in the number of IPOs launched and the amount raised in 4Q2020, with 536 IPOs raising US$119.1 billion ($158 billion) in proceeds.
“In China, the diversity of tech companies is not as wide as that in Hong Kong. Now, those on the Mainland can invest in tech listings in Hong Kong through Stock Connect. So, I do see that there will be more follow-up buying into China’s tech companies being listed in Hong Kong. That will change the Hong Kong marketplace in a much more constructive way,” says Chiu, who was speaking at Indosuez Wealth Management’s 1H2021 outlook conference, where she highlighted China as the house’s top pick when it comes to investing in Asia Pacific.
In 2020, China accounted for 17% of the global GDP and 54% of China’s GDP came from the service segment, implying massive spending power in China and the long-term appeal of the consumer and high-tech sectors, says Chiu.
She outlines six key factors underpinning the positive outlook for China’s equities. Firstly, Chinese equities are set to recover and see a sharp improvement in earnings of 33%–40% this year. China’s GDP likely grew 2.3% in 2020 thanks to a strong rebound from the pandemic-induced slump early in the year.
Chiu attributes the recovery to strong and stringent guidelines to curb the infections from worsening. In contrast, global GDP ended 2020 3.5% lower, according to IMF. Secondly, consumption growth will surpass that of investments and exports and become the dominant GDP growth driver for this year. Thirdly, history has shown there is a positive correlation between the appreciation of the Chinese yuan and Asia’s price performance.
The fourth driver relates to the tailwind of a weaker US environment. Loose monetary and fiscal policies in the US should continue to drive the USD lower, helping Asian equities. Chiu also notes strong flows and liquidity in Hong Kong. Last year, Southbound trading volume increased notably, with Hong Kong recording net inflows of around RMB600 billion ($123 billion) through Stock Connect, 2.5 times larger than a year ago.
The drop in net inflows was expected to be so drastic during the Lunar New Year that investors had to be reminded that the Mainland was taking a longer break than usual.
Finally, Chiu believes there will be larger participation from global Emerging Market (EM) funds.
Currently, Chinese stocks are around 2% under-owned by EM funds and she sees EM portfolio money managers putting a bigger proportion of the funds they manage into China shares. “In fact, we have already seen this move in the making. In the past month, Chinese equities have recorded a positive weekly net float of around US$1.2 billion,” she adds.
That said, Chiu advises investors to adopt a “two-pronged approach” this year when looking at China and Hong Kong. “As far as Hong Kong and China are concerned, I would suggest they adopt a barbell strategy. They should consider some of the old economy stocks that would benefit from the cyclical rebound but, at the same time, capture the long-term growth potentials of some Chinese tech companies,” she says.
Chiu also asks investors to pay attention to stocks that will potentially benefit from China’s 14th Five-Year Plan, where economic policies for 2021 to 2025 will be announced.
While the full details of China’s latest plan will only be revealed in March, some key highlights include an emphasis on high-quality growth, supply-side structural reform, domestic demand, technology and green production.
“We like consumer discretionary because of the unwinding of consumption power post-pandemic. We also like tech media and entertainment for long-term growth and potentials from digitalisation, and some selective financials and industrial names,” says Chiu.
Chiu is not singularly focused on China. She also highlights information technology stocks in Taiwan and South Korea, along with banking stocks in the latter, owing to their “strong linkage to global economic recovery”.
Within Asean, Singapore should achieve herd immunity faster than its peers, says Chiu. She singles out the banking sector here for a strong rebound post-Covid-19. “Large Singaporean banks, in particular, should benefit from the shrunk deposits and capital ratios.”
Although Chiu remains positive on the Asia Pacific region, she warns of uncertainties such as US-China trade frictions, credit and regulatory changes in China, the USD trend and the speed and effectiveness of Covid-19 vaccinations. “Now, if these variables were to deteriorate, it would certainly derail the overall market confidence and growth prospects. At this juncture, however, the risks are manageable,” she adds.
Yellen and the USD
With a political reshuffle underway in the US, Secretary of the Treasury Janet Yellen is coming to the rescue, says Davis Hall, head of Asia capital markets at Indosuez, but not without certain risks.
“If you remember, the previous administration of Trump on one side and Mnuchin on the other [were] ‘devaluationists’ of the US currency,” says Hall at the same briefing. “Well, the US dollar fell 13% and because of all the imports of medical supply, the US current account deficit is at a record high.”
Hall notes that Yellen did not explicitly back a strong USD. When asked in January about her dollar policy as the incoming secretary, Yellen said she much preferred to allow the free market to find its equilibrium, says Hall.
“She didn’t say she wanted a weak dollar either. But this clear indifference could be a negative for the dollar in the years to come under the Biden administration, who will certainly stimulate [the economy] and add more debt to the existing situation,” adds Hall. “She encouraged the incoming Biden adminstration to come out with a big bazooka and to borrow as much money as possible, given the very low levels in yields and low borrowing costs.”
Yellen has a tightrope to walk this year though. “It’s going to be super tricky … I’m very concerned that the markets will, at some point, test her policy,” adds Hall.
Decade of dedollarisation
With Biden in the White House, the world expects less aggression and more respect for international bodies, says Arjan de Boer, head of markets, investments and structuring in Asia at Indosuez. “In short, we’ll be able to sleep a little bit better.”
See: Covid-19 brings the end of US exceptionalism
“But will Biden himself be able to sleep better? They have a mounting trillion-dollar debt; they have a very divided nation; a raging pandemic and many other issues,” he adds. “It’s likely that the US will be more inward-looking and consumed by its own issues, and that we might see a new global power taking centre stage in the century ahead.”
Similarly, Hall echoes his forecasts of a “decade of dedollarisation”, a sentiment he had shared last September. “The dollar is really at risk of losing its seigniorage,” says Hall. “It’s less used in the world than ever before. If you look at China and Russia, they’re doing much more trade, and [they] almost barter in physical gold, or accept each other’s currencies and bypass the dollar altogether.”
Hall also notes that 38% of US bonds are still held in foreign hands. “So, there’s still a great deal of IOUs due to foreigners.” As of last December, Japan held US$1.256 trillion worth of US government bonds while China held US$1.06 trillion. These two Asian countries are the largest creditors of the world’s largest economy, which has US$7.036 trillion outstanding. The UK is a distant number three at US$446.6 billion.
For now, the US Fed is buying a huge amount of these bonds. “But there may come a time when foreigners require a much higher premium for the credit risk of US debt,” he warns.
“It literally costs a million dollars a minute to service the existing debt load. If interest rates were to come up, the US dollar would really be vulnerable. This is definitely Asia’s decade,” says Hall.
On crypto and shorts
Despite the recent buy-in from a handful of Wall Street banks, Indosuez Wealth Management is “shying away” from cryptocurrency.
“Our credo is: if you cannot explain all the details to your clients, then stay away from it,” says Arjan De Boer, head of markets, investments and structuring. “It’s very difficult to see whether bitcoin is worth US$30,000 ($39,801) or US$50,000. So, cryptocurrency is an area that we’re sceptical about and we don’t want to advise on that.”
On the recent short selling fiasco in the US involving so-called “meme stocks” like GameStop, equities advisor Ryan Landolt thinks banning the practice would be a bad idea. “
When you have a healthy functioning market and you have certain stocks that are sold short, people buying back to take the profit can put a cushion under a complete collapse. Now, if you ban that practice outright, you could get a situation where nobody’s buying back the shorts. So, you can get an even more serious collapse,” he warns.
“But should regulators allow banks to let companies accumulate 150% short interest? Caps on the amount of a float of a company that’s allowed to be short sold are something we would like to see,” adds Ryan.
“Twitter is not new. Reddit is not new. I’m surprised this hasn’t happened previously. But in a few years, we’ll probably be watching movies like The Big Short Squeeze or something,” says Ryan, drawing inspiration from the 2015 blockbuster The Big Short, which was on the 2008 sub-prime crisis.
