China Tech: Regulatory pressure mostly discounted. The sector is getting relatively attractive vs. US one
- Chinese regulators have recently strengthened regulations on online platforms, pledging to combat big data-enabled price discrimination against customers and monopolistic behaviours.
- This additional regulation pressure is mostly discounted by investors who monitored the adverse regulatory news flow since the last summer or even February 2021.
- Since mid-July, prices of involved stocks and the MSCI China are down by nearly 20% and more than 50% since mid-February (-35% for the MSCI China).
- As a result, the MSCI China index is now fairly valued in our opinion from being expensive (30%) in February last year, while the Chinese MSCI Tech index looks quite cheap judging from our fair value model, with investors’ positioning very muted.
- Currently, we do not recommend buying aggressively the China Tech as it could be affected by further negative spillovers coming from the US Tech sector, which remains rather expensive and is under pressure from increas-ing US real yields.
- The spread of Omicron and China’s zero-tolerance COVID approach during the winter Olympics is likely to have negative effect on growth. We expect monetary and fiscal policy to become more supportive after the Olympics (starting from the end of February) to support the economy.
- While waiting for clearer signs of a more benign policy (both monetary and fiscal), we would recommend shifting some positions from US, and US Tech stocks in particular, into China and China’s Tech stocks.