Investors in China are being told to brace themselves for more volatility in the coming weeks as markets react to the increased regulatory scrutiny of the technology sector.
Last week, our sister publication Portfolio Adviser reported that the share prices of several mega-cap Chinese tech firms saw enormous falls as China’s latest crackdown on the education sector prompted investors to rush for the exit.
But for Chris Metcalfe, investment director at Iboss, last week’s events bring with them investment opportunities, while he also cautioned investors in US tech firms should take note.
“Whilst the words like ‘uninvestable’ are currently being thrown around with abandon, it is worth highlighting that the regulatory restrictions only apply to a small segment of digital/online services and does not yet apply to the majority,” he said.
“The reaction to the breaking news on education was a much more broad-based selloff based on fear of what comes next,” he added.
Education profiteering
So what actually happened that caused shares in the tech giant Tencent to have its worse trading day in over a decade and what will happen next?
In short, the Chinese authorities have cracked down on online after-school companies and stopped these educational services from making profits or raising capital.
“China has its so-called ‘three big mountains’,” explained Metcalfe. “These are the most significant issues for society and include; unaffordable education, healthcare and housing. We think it is not unreasonable to expect ongoing legislation and government interference in each for the foreseeable future.”
As a result, Metcalfe urged caution that, despite the almost universally adverse reaction outside of China to the new crackdown, not all new regulations are harmful.
“For the best active managers with the greatest understanding of the motivations and workings of the Chinese government and its corporations, the newly minted self-inflicted chaos will create many longer-term opportunities,” he said.
Looking in the wrong direction
For Metcalfe, the big question right now for investors is not about China but the US. Namely will the US authorities finally manage to pass and implement some meaningful antitrust legislation?
“The implications, if they do, are impossible to quantify,” he warned. “It might not be many peoples base case, but it has to be a risk of which we should remain cognisant.”
Indeed, Metcalfe noted how the different authorities react to the different celebrity names associated with their tech firms.
“The Chinese authorities put up with Jack Ma’s somewhat confrontational and rather patronising way of dealing with them until they finally had had enough,” he said. “Contrast that with the likes of Elon Musk, whom some would say pretty much acts with impunity.
“There has to be a chance that some level of government and regulatory intervention might actually be beneficial.”
