Date
26 February 2020
Chinese equities are expected to gain further, despite fluctuations that may be brought about by geopolitical events, says the author. Photo: Wikimedia Commons
Chinese equities are expected to gain further, despite fluctuations that may be brought about by geopolitical events, says the author. Photo: Wikimedia Commons

Year of the Rat: Chinese stocks set to thrive in 2020

According to the Chinese almanac, 2020 is the Year of the Rat – the symbol of wealth and vitality. With how the markets have been performing, many investors are hoping that this is the year their portfolios result in just that.

Press reports indicate that global stock markets have posted their best year since the aftermath of the financial crisis a decade ago. The MSCI World Index, which tracks stocks across the developed world, surged almost 24 percent last year – the strongest performance since 2009. In addition, technology giants posted an impressive recovery both in the United States and Europe while Asian stocks surged.

One of the highlights that many investors would notice was the performance of Chinese stocks. Moving their way from the bottom to the top of the major global index rankings last year, Chinese stocks stole the show from their Wall Street counterparts. China’s CSI 300 stock index leaped by 36 percent last year as Beijing cut borrowing costs, and index-tracking consumer staple stocks jumped 80 percent.

Zeroing in on China, one sector seems to be standing out among the rest – technology. Recently, Beijing announced its intent to achieve technological autonomy, a result of the constant threat of a decoupled technological supply chain with the United States. This inevitable decision led to tech shares in China surging over 60 percent.

While Chinese tech stocks have put up a strong showing last year, the current state of geopolitical affairs has us asking – will this augur well for the New Year?

Chinese tech stocks in 2019

Last year, Chinese tech giants Baidu, Alibaba (09988.HK) and Tencent (00700.HK), also known as BAT, came under intense scrutiny by the United States, and both Baidu and Tencent had to face regulatory hurdles. As a result, their collective performance in 2019 was mixed.

When Chinese regulators brought their attention to the advertising market in 2019, the share price of China’s largest search engine, Baidu, fell by around 20 percent. On the other hand, Tencent, one of the world’s largest gaming companies, grew its online revenue by 11 percent year-on-year in the third quarter after China reinstated video game approvals. Alibaba, the best performing of the three, saw its shares rise 55 percent thanks to the strong performance of their core commerce division.

In addition to China’s counterpart of FANG, many other tech firms are continuing to make a name for themselves. ByteDance, the owner of social media app TikTok, surpassed Baidu and Tencent in digital ad revenues in the first half of last year. Meituan Dianping (03690.HK), China’s largest on-demand services provider, has also proven a worthy opponent for Alibaba in the food delivery sector, while JD.com and Pinduoduo remain the conglomerate’s rivals in the e-commerce space.

What drove the strong performance?

In addition to the tech war between the US and China, there are a number of reasons for the strong performance of Chinese stocks, chief among them being the global investors’ growing interest in Chinese tech companies. China’s launch of its own Nasdaq-style STAR market showcasing some of its most promising tech companies was the catalyst to drive increased foreign interest in the sector.

The investment into China’s tech companies has also been fueled by big developments in hot areas such as 5G, cloud, artificial intelligence (AI), and blockchain. Baidu has become a national AI champion with innovations such as robotaxi services, and Tencent has been diversifying and growing its cloud and payments divisions.

The Chinese government’s support for future technologies has set the country apart from the rest of the world. Recently, China even announced a nationwide blockchain network – the Blockchain-based Service Network (BSN). The ambitious project will launch in April 2020 as it looks to provide a trusted infrastructure for future blockchain innovations.

How will Chinese tech stocks perform in 2020?

In order to accurately determine the future performance of tech stocks in China, we must look at the overall state of China’s economy.

Although the recently published WEF Global Risk Report outlines several risks to be wary of this year, Chinese stocks are predicted to remain bullish in 2020. As both the world’s second-largest economy and second-largest equity market, China’s blue-chips are well-known, well-run and are considered essential in any investor’s diversified portfolio.

Chinese equities are expected to gain further, despite fluctuations that may be brought about by geopolitical events such as the ongoing US-China trade war. If traders focus on fundamentals such as results and growth potential, rather than the fluctuating prices, this can often yield good results.

China’s economic growth is forecasted to be in the region of 6 to 6.5 percent. With many investors still wary of the effects of the trade war, the inking of a Phase 1 trade deal earlier in the year has restored stability to global investments.

With an economy set to thrive and an expected continued improvement in US-China relations, growth in China’s tech industry remains strong. Originally seen as followers, Chinese companies are beginning to show true innovation, resulting in China’s transformation into a rising technology powerhouse.

While celebrations for Chinese New Year might have ended, it can be expected that tech firms in China are positioned to experience the effects of the Year of the Rat all year long.

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RT/CG

Senior analyst at eToro