China’s recent crackdown on the tech and education sectors may have wiped off hundreds of billions in market value, but signs of regulatory action were already apparent from last November, says Mark Matthews, head of research, Asia Pacific at Julius Baer.
What Matthews did not expect, however, was how violently China would crack its whip.
“I thought it would be a tweak — that happened in Macau in 2014 or with the online gaming companies in 2018. Now we know it’s something completely different,” he says.
“What we liked about the Chinese stock market was precisely what we liked about the American technology stocks: the unprecedented free cash flows and the fact that they’re right at the heart of the digitalisation of the economy, which is where you want to be,” adds Matthews.
Speaking at a media briefing on Sept 14, Matthews highlights the irony that China’s digitalisation was both boom and bust for the technology giants. “It was precisely those enormous and unprecedented cash flows the technology giants were generating that caused the government to intervene. Now, shareholders won’t be able to profit from that digitalisation of China’s economy in the same way that they will the digitalisation of the US economy.”
Matthews says Indian tech companies do a lot more than just business process outsourcing, which was what they did, say, 10 to 15 years ago
That said, China’s plans for its third stock exchange in Beijing — after Shanghai and Shenzhen — is proof that the government is still promoting its onshore capital markets to investors, says Matthews.
While the exact figure of China’s household wealth is unknown, Matthews estimates some US$40 trillion ($54 trillion) in their pockets. “Over half of that is in property and only around 7% is in equities,” says Matthews.
“But the government has made it clear property prices won’t be allowed to rise like they did before. So, it would make sense for Chinese households to move more money into equities,” he adds.
The Chinese onshore stock market carries a capitalisation of about US$12 trillion, says Matthews. “So, if household wealth invested in equities grows from 7% to 14%, which is where it is in Taiwan, that would have a big impact.”
Given the present circumstances, Matthews recommends the consumption, healthcare and green energy sectors in China, which are “highly investable”.
“We recommend people do it, but we can’t expect the same kind of returns like what we were getting in the digital companies because their cash flow is just so high although it won’t be in the future,” he says, referring to the longer gestation periods of the projects undertaken by companies in these sectors.
Still, Matthews prefers the offshore market. “[The onshore markets] are very sentiment driven [and] not very liquidity driven. That’s really not the kind of way that one should invest long-term … The returns on equity will be higher in other markets than in the Chinese consumer space.”
India in focus
Instead, Matthews suggests investors look south within Asia. “Our major overweight shifted from China to India. Admittedly, it’s a much more cyclical market than China but there are technology companies in India; if you add them all up, they’re about 20% of the MSCI index.”
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These technology companies are also defying stereotypes that investors may hold about the Indian market. “They do a lot more than just business process outsourcing, which was what they did 10 to 15 years ago,” says Matthews.
Today, these companies are in data analytics, artificial intelligence, digital marketing, cloud computing, Internet of Things and blockchain, to name a few. “I think India is quite interesting from a digital perspective, because the Americans were given a free lunch there until recently.
A couple of years ago, the Indian government started telling those American technology companies: ‘Look, we know you’ve done very well in our market, there’s still a lot more business for you if you want, but you’re going to have to share some of that business with the locals,’” says Matthews.
He points to a “big pipeline” of over 100 companies lining up to list in India, made up mostly of “pure Internet companies”. “It’ll have a more digital flavor in a few years.”
In addition, India’s population is primed for a bull run. According to Matthews, India entered a period of “favourable” demographic growth in 2018 when its working age population overtook its dependent population in size.
Japan experienced this in 1964, says Matthews, and the Tokyo Stock Exchange doubled in size over the next five years. The same thing occurred in South Korea from 1987, with the Korean Composite Stock Price Indexes (Kospi) growing 120% in five years. Next to benefit was China, with the Shanghai market up 75% between 1994 and 1999.
India’s markets have gained 50% since 2018, perhaps proving Matthews right. He predicts this demographic trend to last till 2055. “I would argue there’s more to come.”
Singapore catches up with SPACs
At home, Matthews also touched on the Singapore Exchange’s (SGX) long-awaited green light for Special Purpose Acquisition Companies (SPACs). Despite being headquartered in Singapore, tech giants like Sea have chosen to list in the US while gaming peripherals maker Razer chose Hong Kong.
Thus, SPACs are an “excellent idea” for SGX, says Matthews, who is based in Singapore.
He notes that the Singapore market was “left behind” by its own homegrown names.
“We all know that the Singapore market has been left behind — let’s face it — and hasn’t managed to get any of the listings that it naturally should have gotten [like] Sea, Grab and GoTo, the merger of Gojek and Tokopedia. You would think that [they would have listed here] but they haven’t been able to,” says Matthews.
Grab’s record merger deal with US SPAC Altimeter Growth Corp, worth nearly US$40 billion, is expected to be completed in the fourth quarter.
A proposed revamp of Indonesia’s listing rules has delayed GoTo’s plans. It is likely to launch its IPO in Indonesia early next year, followed by a US listing.
Can the new listing rules end a dry spell for SGX? In the first half of 2021, SGX had three IPOs with total proceeds of $337 million, according to Deloitte. A recent fourth IPO, Audience Analytics, raised paltry net proceeds of barely $4 million. That pales in comparison to the 11 new names SGX welcomed last year, which raised some $1.34 billion in total, including the more than $500 million raised by Nanofilm Technologies International, which is now in the list of “quality stocks” recommended by Julius Baer.
SGX’s prayers may be answered soon. The bourse could receive its first SPAC listing application in “the next couple of weeks”, SGX CEO Loh Boon Chye told CNBC on Sept 17.
From Matthews’ perspective, the SPAC framework could even get huge local firms back to their home bourse. “I think a little moral suasion could be applied to Grab or Sea do a little ‘common prosperity’; after all, their owners are Singapore citizens,” says Matthews in a reference to China’s recent stock market crackdown in a bid to improve social equality.
As SPACs come into play, however, Matthews is concerned about the quality of companies that may take advantage of the listing framework here.
“Unfortunately, if we look back in history with the S-chips back in the 2000s and there were some other things like Myanmar plays for example; Singapore somehow does get these very speculative and lesser-quality companies listing here,” he says.
See: SGX's latest announcement on SPAC framework welcome: RHB
See also: The scandal of S-chips
China-based companies that listed in Singapore, otherwise known as S-chips, were actively pursued by SGX to revive interest in the stock market. In 2004 alone, there were 40 such listings. However, many S-chips collapsed due to poor corporate governance, leaving investors with massive losses and driving them away from the market.
“So, I hope that these SPACs won’t be like that; I don’t think they will,” he says. “Hopefully, with the SPACs, there’ll be a change in that.”
Header photo: Bloomberg / Other photos: Julius Baer
