11 August 2020
As US-China tensions intensify, the new normal appears to be a confrontational power rivalry with explicit bans and sanctions. However, GAM Investments’ Jian Shi Cortesi says it only enhances her bullish long term view on Chinese tech.
On 7 August, US President Donald Trump ordered firms to stop doing business with Chinese social video app Tiktok within 45 days. President Trump has issued a similar order against China's WeChat, a messaging app owned by Tencent, in the latest escalation in Washington's standoff with Beijing. In our view, this is simply another move in the US-China rivalry, which Ray Dalio explained so well in his writings1.
China has become a strong economic competitor of the US and is challenging the one leader world order. China’s economic size is already larger than the US purchasing power parity, or 70% of the US size in nominal exchange rate terms. Moreover, China is now competing with the US on advanced technology. US efforts to deter China have shown up in various forms - trade wars, Huawei bans, Chinese ADRs delisting, Tiktok and Tencent, with potentially more to follow.
It is likely that the US will continue to use various ways to deter China. In our view, an unfriendly external environment will lead China increasingly focus on domestic demand. China will also be forced to increase investment in technology in order to be self-sufficient, and develop a full tech supply chain by itself. This bodes well for the domestic technology sector.
Returning to the US ban on Tencent, most listed Chinese internet companies are domestic businesses and have little business exposure in the US - revenue and profit exposure to the US for these companies is 0-3%. In our view, the US ban on Chinese internet companies will have little impact on the revenue and earnings of most listed Chinese internet companies. It hurts sentiment, which could push the stock prices lower and create a buying opportunity. Tiktok, meanwhile, is the first Chinese app that really entered the US market, but the company is unlisted.
During Covid-19 and post Covid-19, the world is moving further into a low yield and low return environment, where many companies will struggle to generate revenue and earnings growth. However, Chinese internet companies continue to enjoy structural tailwinds. Many of these companies can continue to grow revenue and earnings growth at a +20% pace. We believe it is one of the best sectors in China to invest in.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. August 2020.