Larry Berman: Tracking China's tech sector
Antitrust issues have been a market factor since 1887. A company gets too big and it can hurt consumers. There is a basic history lesson here.
In recent years, Big Tech companies like Microsoft Corporation, Alphabet Inc.’s Google, Facebook Inc., and others have been caught in the Congressional crosshairs. Jeff Bezos at Amazon.com Inc. was a particular focus for former U.S. president Donald Trump and Google has several ongoing actions in the EU and U.S. courts. Yet their shares 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 Jinping 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 the percentage returns of Alibaba Group Holding Limited against Amazon and highlights the date the Chinese government stepped into prevent the IPO of Jack Ma’s Ant Group after the founder made disparaging remarks about the government.
Chinese regulators have also levied fines on 12 other Big Tech companies including Tencent Holdings Limited and Baidu Inc. There is a great ETF for tracking the Chinese tech sector that I have followed over the past few years (KWEB). Its top 20 holdings can be seen in the table below.
The degree of speculation in all corners of the tech sector 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 decline of 15 to 30 per cent in many of the stocks, and for the ETF overall. Recently, the forced selling around speculative deleveraging has often been seen on the flipside of the speculative move higher that accelerated in January.
I expect antitrust issues will be a headwind for Big Tech over the next few years as governments look for revenue to help offset their massive deficits. I 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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