Led by Chinese tech stocks, the Asian tech sector has experienced significant price reductions in July . As seen in the HSBC Hang Seng Tech Index ETF (Chart 1) which tracks 30 China’s technology companies listed in Hong Kong, has slumped from February high at HK $10.9 to HK $6.2 all-year trough in July and stabilized at HK$ 6.7 in August.
Another popular ETF, KraneShares CSI China Internet ETF (KWEB) that tracks Chinese internet companies which are dual-listed in both the United States and Hong Kong and provide services at par with Google, Facebook, Twitter, eBay, Amazon, etc. has also slumped to new low at 49 on July (Chart 2), due to China’s regulatory tightening.
Overheated valuations of tech stocks have experienced price corrections due to China’s regulatory forces and may even trade a bit lower. Market commentaries on how regional tech stocks will perform for the second half of this year are not all following the same flow.
1. No quick upsurge of stock prices based upon the current atmosphere of China’s continued intensifying regulatory forces
Being the major driving force behind the Asian Tech Sector , Chinese tech stocks have struggled over the past couple of months especially due to tightening regulation on Chinese technology companies. There exists high uncertainty of policy directions from Beijing which deems forecasting regulation measures insurmountable, but it is almost certain that the tide of China’s regulatory reforms should continue and turn to be more intensive. If this is the case Chinese tech stocks may not see large price rebounds by the second half of 2021.
2. Tech stock from other Asian countries will become the shelter from policy-induced market slump.
Panic sell-off of Chinese tech stocks triggered by series of recent regulatory crackdown has led the hot money to chase tech stocks from other Asian countries. India’s tech stocks have emerged to be one important regional shelter justified by active venture capital investments in young Indian e-commerce and fintech companies and the forecast of a considerable number of tech companies going public in this regional technology hub in near future. According to CNBC, India-listed food delivery app Zomato has surged by over 80% on 23 July during China’s regulatory crackdown. Tech stock’s IPOs blossomed by the accelerating digital economy in India may open floodgates fueled by money from panicked investors looking to flee the Chinese tech sector.
As advised by Nancy Tengler from Laffer Tengler Investments, bearish sentiment over Chinese tech stock prospects will continue to remain if the regulatory direction of Beijing is to continue to extend a heavy hand over designated sectors with socio-economic issues. Ms. Tengler suggested seeking technology exposure by directing focusing on other regional alternatives like South Korea’s and Taiwan’s semiconductor sector. Staying away from Chinese tech stock for the remaining part of 2021 may be viable strategy.
3. Market comeback
Certain optimistic tech stock analysts believe that for the second half of 2021 Chinese tech stocks which are undervalued but maintain positive earnings will see a price comeback. For the first half of 2021, the performance of tech stocks has lagged behind healthcare, consumer-related, financial as well as policy-favored sectors including renewable energy and electric vehicle industries. As commented by Zhu Chaoping from JP Morgan Asset Management, Chinese tech stock are undervalued at par with their U.S. counterparts. Squeezed valuations by policy tightening attract investors who seek favorable trade-offs and believe the regulatory issues have been priced in the valuation of tech stocks. Compared to other parts of the world, Asia is believed for the second half of 2021 to depict a strong recovery benefitting corporate earnings (Chart 3) especially in technology and consumer-related sectors. For this reason, price support is right here. The market may once again buy in the earnings quality and growth prospects of Asian tech stocks.
Facing uncertainty factors including China’s policy, Covid 19 pandemic & variants and tense Sino-U.S. relation, investors are forecast to seek sectoral spread in their investment portfolio. Investors will be addressing a more balanced exposure to diversified industry sectors in coming quarters for 2021, exemplified by reaping traditional hedging strategies through letting high growth tech stock be offset by positions in the industrial, consumer, and financial sectors which are not heavily affected by regulatory atmosphere.
