As US ‘big tech’ makes up around a quarter of the market capitalisation of the S&P 500, when sentiment turns negative, a big tech sell-off can often drag the rest of the market down with them, as was seen recently.
In China, there is a similar concentration of the biggest tech giant with Alibaba and Tencent making up around 30 per cent of the market capitalisation of the MSCI China index.
But it is actually the biotech sector where valuations were looking more toppy, according to Catherine Yeung, investment director of the £2.2bn Fidelity China Special Situations trust.
Yeung said it is in the biotech industry that is likely to be hurt more because it has become “a very crowded trade”.
She said when certain biotech names in China are up more than 800 per cent year-to-date, it is usually an indication that “people aren’t buying fundamentals, they’re just buying a theme or certain sectors”.
And Chinese biotech companies have benefited from a lot of government support as they strive to compete with some of their bigger global peers.
Furthermore, many biotech stocks have been buoyed after the Hong Kong stock exchange introduced new rules in 2018 allowing pre-revenue biotech companies to list.
While, the Fidelity China Special Situations trust – managed by Dale Nicholls – has several biotech names in its portfolio, including Hutchison China Meditech and Wuxi Apptec Co, but Yeung said these were very much first movers.
Yeung, who also serves as investment director of the £235m Fidelity Asian Values investment trust, observed that Chinese mainland stocks, as well as South Korean and Taiwanese stocks are being well supported by the retail investor.
“In China, Taiwan and South Korea, about mid 90 per cent of daily turnover is driven by retail investors,” she said.
Retail investors have supported the trading of big tech stocks in China. In Hong Kong, Yeung explains how Tencent is also known as the ‘Great Wall of China’.
“The retail investor base buys Tencent like they historically bought HSBC, they call retail bids almost like a brick in the wall,” she explained. “Even if you see large institutional selling on a given day, the individual bids create a floor.”
While retail investors still may pile into Chinese big tech, Yeung pointed out that the growth story is also still very much intact for these businesses.
“You can't go out throughout your day without using Alibaba or Tencent,” she said. “These ecosystems are huge.”
While Amazon and Microsoft have growth stories ahead of them, namely the growth of cloud, e-commerce, and advertising for Amazon and enterprise software, cloud and gaming for Microsoft, the story is just as exciting for Alibaba and Tencent.
Both Alibaba and Tencent are growing their cloud businesses, but it is the fintech business that the manager highlighted, which both companies are heavily investing into.
Discussing the listing of Alibaba founder Jack Ma’s Ant Financial, the fintech company valued at around $150bn, Yeung said it be a “mega blockbuster IPO”.
“Investors don't just like Chinese banks because they haven’t been proactive in terms of capex in the fintech space, but because frankly most people use Alibaba and Tencent’s fintech technology,” she said.
Yeung also highlighted Alibaba’s e-commerce growth. She said the move into rural consumption and ownership of the logistics around it has done extremely well during and after the lockdown as more people buy online.
As China transitions towards being a more developed economy, Yeung said more global investors will be adding Chinese exposure to their portfolios.
And while she admitted that it is still not quite the same as investing in developed markets, there have been some meaningful reforms being put in place in the past few years. She noted the country’s corporate governance code launched in 2002 recently had its first revision, in 2018.
“Under these guidelines for example every listed company has to have a dividend policy,” she said.
“Retail investors will start to expect dividend yields, and this pay-out ratio theme and importance of dividends are going to be more and more important in China.
“And ultimately [it] will be great for foreigners because you are actually seeing better-quality management teams in terms of how they are looking after their balance sheets.”
Yeung concluded: “You are seeing a lot of proactive reforms but some parts of [it] is quite emerging markets-like, even though it's the second largest economy in the world.”
Performance of Fidelity China Special Situations over 5yrs
Source: FE Analytics
Fidelity China Special Situations has returned 195.5 per cent over the last five years compared with a 126.71 per cent gain for the MSCI China benchmark. The trust is 20 per cent geared, has ongoing charges of 0.99 per cent, and is trading at a 7 per cent discount to net asset value (NAV), according to the Association of Investment Companies (AIC).