China’s major crackdown on the tech sector has led to foreign reluctance to invest in the mainland markets at levels unseen before, according to Julius Baer’s Asia Pacific head of research Mark Matthews.
E-commerce, education, gaming and more have all come under pressure as Chinese authorities crack down on the tech sector in an ongoing anti-monopoly drive.
The unexpected intensity of the crackdown has led to a downturn amongst foreign investors, as evidenced by recent SEC filings, with reduction of U.S.-listed Chinese stocks amongst hedge funds like Tiger Global, Third Point and that of George Soros’ – recently a particularly vocal critic of Chinese President Xi Jinping.
«I totally understand why [foreign investors] would be reluctant to invest in China because it has changed,» said Julius Baer’s APAC head of research Mark Matthews in a virtual roundtable yesterday. «This is the biggest change I’ve ever seen in my career, which is 30 years.»
Changed Trajectory
According to Matthews, this shift in sentiment was primarily driven by the scale of the crackdown and its expected negative effect on cash flow – a key driver of returns.
«If you look at the performance of Chinese [American depository receipts] versus the broader U.S. market, they’ve given back all of their outperformance since 2004,» he explained. «It’s all gone and I don’t think it’s coming back.»
Lower Growth and Returns
In addition to a tech crackdown, Beijing has also been publicly touting its focus on «common prosperity».
Matthews expects that this will lead China to migrate to an economy similar to Germany, France or Japan resulting in more state intervention, state ownership and lower growth but smoother cycles and fewer crises.
«The reality is what markets like and what's good for society are not always proportionate,» he said. «Markets are cold and agnostic. They are really just interested in cash flow and so the more cash flow the company gets, the more the share price goes up.»
Other China Opportunities
Although investors may not be able to replicate historical returns in China, Matthews notes that there are still other areas with opportunities that are backed by both structural tailwinds and government support such as consumption, healthcare and green energy.
He also advised against bottom fishing at the moment due to an expected drop in future valuations and the difficulty of timing the end of the current crackdown.
The bank’s chief investment office downgraded offshore Chinese equities in July but remains overweight on the onshore market.
