Chinese Tech Stocks in the Crosshairs
Antitrust issues have been a market factor since the 1887. A company gets too big and it can hurt consumers. There is a basic history lesson here. In recent years, big tech MSFT, GOOGL, FB and others have been subject of Congressional crosshairs. Jeff Bezos at AMZN was in the crosshairs of President Trump. GOOGL has several ongoing actions in the EU and US courts. Yet they keep moving higher and valuations are rising.
While there are elements of antitrust in China, the major issue in China today seems to be more about big tech getting too powerful and challenging president Xi and the Chinese Communist Party. You can read about why China is cracking down here.
The level of political risk has always been high in China. It is something to factor into investment decisions to be sure. Overall valuations on big tech have generally hit a ceiling since Pfizer Monday in early November. Most of the companies that thrived during 2020 lockdowns have cooled as excitement over reopening has shifted asset allocations and interest rates have started to rise.
The chart below shows BABA vs. AMZN (% returns) and highlights the date the Chinese government stepped into prevent the IPO of Ant group (Alipay) after Jack Ma make some disparaging remarks about the government.
Oct 21, 2020 “The Chinese government is currently reconsidering its approach to regulating the tech giants, launching an anti-monopoly investigation into Alibaba.”
The Chinese regulators have fined 12 companies including Tencent and Baidu. There is a great ETF for tracking the Chinese tech sector that I have followed over the past few years (KWEB). The top 20 holdings can be seen in the table below.
The degree of speculation in all sorts of technology hit a clear peak in recent months. History suggests that we could see these stocks revert to their bullish longer term trendlines. We could see another 15-30% decline in many of the stocks and for the ETF overall. Recently, the forced selling around speculative deleveraging is often seen on the flipside of the speculative move higher that accelerated in January.
We expect antitrust issues will be a headwind for big tech over the next few years as governments look for revenue to help offset the massive deficits. We love the innovation and technology sectors, but valuation does matter and uncertainty around antitrust is rarely a positive.
This week in our weekly Thursday Spring 2021 Berman’s Call virtual roadshow we will focus on technology sector ETF investing including some of these high flying high volatility ETF opportunities. Register at www.etfcm.com or at www.investorsguidetothriving.com The format this series will be a 30-40 minute weekly presentation that changes each week to current market developments and a 30-40 minute Q&A.
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