The tech rally you might have missed, but shouldn't ignore (and 3 stocks to play it)

If you haven’t been paying attention recently, there has been an incredible rally in tech stocks. They have been absolutely flying. But not on the Nasdaq, and not here in Australia.

This tech rally is taking place in China. The surge in valuations, which has seen some $700 billion added to the value of Chinese tech stocks in a very short space of time, is due to a couple of factors, including reopening and regulatory easing.

Before we dive into those factors, some context. Whilst the recent rally has been sharp, with the Hang Seng Tech Index up around 60% since October, the rout that came before was even deeper and longer. Even with the recent gains, the tech space is still off about 60% from the 2021 peak.

In terms of factors driving the rally, regulatory easing has been the most telling. One of the most oft-discussed reasons for not investing in China is the opaque regulatory environment and propensity for heavy-handed government intervention. And that is not restricted to the tech sphere. Many Australian companies, across mining and agriculture, know all too well the impacts of unilateral and often unchallengeable government decisions.

With the relaxing of regulation in the tech space, many international asset managers who were previously reluctant to invest, or had indeed fled the market in recent years, have come pouring back in.

Analysts have also joined in. Once considered “uninvestable”, the sector is now awash with bullish calls, adding to the positive momentum. Morgan Stanley recently recommended buying “large-cap, highly liquid Chinese internet companies, with a preference for Alibaba”, whilst BNP Paribas, UBS, and JP Morgan are also in the bull camp.

For a local take, I reached out to Cameron Robertson, Portfolio Manager at Platinum Asset Management, for his take on the recent developments in Chinese tech sector, what it means for local investors, whether there is more upside on offer, and a couple of stock-specific ideas.

1. What is your current allocation to Chinese tech stocks and has it increased in the past six months?

Our holding of Chinese tech stocks in our Asia ex-Japan strategy is around 18%, which is about the same level as it was six months ago.

2. What have you seen as the most important driver of the rally in tech stocks?

Chinese technology stocks have staged a strong rally from the end of October to today, along with the broader Chinese stock market. 

Specific to the technology sector, there are signs that the regulatory environment is turning more favourable after a period of regulatory crackdowns, with game approvals resuming and regulators stating that they feel comfortable with some of the excesses they were seeing across the sector having now been reined in. 

More broadly, the Chinese economy is also seen to be in a better position as COVID lockdowns ease and consumption recovers, as well as stabilisation and containment of weakness emanating from the property sector. This all provides a healthier backdrop for the market and the tech sector in China.

3. The rally has been sharp – the Hang Seng Tech index is up 60% since October – is there more to come or is Chinese tech now fairly valued?

There has been a sharp rally, but it came off very depressed levels. The Hang Seng Index is flat versus ten years ago, so even after this recent rally, the market is still not at elevated levels. Earnings have been weak, given the poor economic backdrop of the past couple of years, and they are likely to improve as economic conditions pick up. 

Sentiment towards the market has been very poor, with many pundits in recent times going so far as to call the market “uninvestable”, and we think there’s still a long way to go before there are fears of investors being overly optimistic, so we feel it’s still a good backdrop for future returns. 

Not only that, but the Chinese central bank has had far less accommodative policy settings than many other major markets, so the stock market there isn’t facing the same headwinds as elsewhere on that front either.

4. Could you talk through some of the largest Chinese tech positions in the fund and why they deserve a spot in your portfolio in 2023?

We have a sizeable position in Tencent (700-HGK), which we expect to benefit from upcoming market launches of new game titles post the recent regulatory crackdown. Two other holdings, Alibaba (9988-HKG) and JD.com (9618-HKG), should both see sales improve as COVID lockdowns end, the economy improves, and consumers go back to spending on goods. We’re also positive about the outlook for some of our lesser-known, slightly smaller Chinese tech holdings, such as Longshine Technology (300682-SHE), a company that is providing software to the power grid, helping the country transform to embrace a larger share of intermittent power from renewable energy and electric vehicle charging.

5. What do investors need to be mindful of if they are looking to invest in this space?

As always in investing, it’s important to try and identify opportunities where you feel the market is missing something or there is a reason why you are being presented with one. 

The past year or so has been a great reminder for investors that just hearing a good story about a company isn’t enough; valuations matter. 

Finding areas that are misunderstood or away from where the crowds are focusing is critical, and risk assessment always needs to be a central part of your investment process. 

There are absolutely opportunities in the Chinese tech space, but stocks have had a big bounce, and some areas may not be very cheap any more. These are industries that are fiercely competitive and constantly changing, so you need to pay attention to how a company is positioned in that dynamic landscape, ­­and corporate governance is also important to keep an eye on.

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