Commentators are warning investors to exercise “extreme caution” around Chinese technology stocks, after a regulatory crackdown by the Chinese government prompted a sharp sell-off in the markets this week.
A leaked government memo revealed that Beijing was planning more severe regulations around the nation’s private education industry, which will prevent companies in the sector accepting foreign investments, raising capital through the stock market or teaching outside school hours.
A further announcement by China’s State Administration for Market Regulation also called for improved standards for food delivery workers.
The onslaught of regulatory involvement saw hundreds of billions of dollars in market value wiped off China’s largest tech stocks this week, including tech conglomerate Tencent and food delivery platform Meituan.
deVere Group CEO Nigel Green said: “The sell-off has been focused on China’s $100 billion private education industry following a leaked government memo highlighting incoming new, tougher regulations. This tough new approach being taken by Beijing has spooked the tech sector which is already on high alert amid fears that the government wants more control over private enterprise.
“It can be expected that some investors will swoop in and view these events as a major buying opportunity. They may have a point – these shares do look like bargains. However, they must exercise extreme caution as the situation remains highly unpredictable and any further similar actions or even suggestions from Beijing will mean more sustained volatility and sell offs. It could be a long time until there is clarity.”
Green added: “As China rolls out another round of regulatory tightening, global stock markets will be impacted and investors must tread carefully to avoid unnecessary risks and to capitalise on the potential opportunities.”
Ronald Chan, founder of Chartwell Capital, said investors interested in China must accept the cultural and ideological differences as part of their investment thesis.
Chan explained: “Remember that markets are fickle and have a short term memory; investors have had a phenomenal run over recent years so investors late to the party have only themselves to blame. Investing in China is two steps forward, one step back. If investors are going to dance with China to capture the development and growth of the country, they need to expect to get their toes stood on occasionally.”
Chan recommends avoiding the big names that have heavy trading volume and believes investors should focus on the Asian post-pandemic recovery story including domestic consumption such as food and restaurant and retail spending.
He said: “We like the quality small to mid-cap companies where we can grasp what exactly is going on in this business and see the catalysts for recovery and growth. Localised themes are also important, such as the broad spectrum of businesses that will benefit from borders re-opening.
“Finally, make sure your portfolio is bullet-proof by having an all-weathered strategy. We like to blend income stocks and quality growth companies that typically move differently and give the portfolio some insulation from volatility and generate more asymmetric returns than a pure beta play.”
Mihir Kapadia, CEO of Sun Global Investments, added: “Concerns indicate the hidden risk faced by business in the world’s second biggest economy. In an indication of both domestic and international concerns, the slide in Chinese stocks occurred despite figures showing the economy expanded 3.2% in the quarter ending June.
“There is a strong consensus that the headline growth numbers were boosted by state dominated and supported heavy industries. In the coming months, analysts will be looking out for signs of the previous state supported industrial output resulting in any consumer sentiment as that would be an organic transition.”
