Jack Lee, China A-shares Fund Manager
Covid-19 has accelerated the transition of our everyday lives to an online world - from entertainment, shopping, working, to socialising. This is even more so the case in Mainland China, where we are seeing a number of technology and internet-related trends emerge.
As a result of Covid-driven lockdowns, working from home has become commonplace for people around the world. This has led to a pickup in demand for computing hardware and the related infrastructure needed to support this (ie. cloud computing, servers), in addition to the increased use of online video conference platforms.
Online shopping has also become more mainstream. In Mainland China and Hong Kong, popularity of online shopping has been boosted by online influencers and celebrities endorsing products on their live streams, a unique trend that was gaining momentum prior to the pandemic.
Beyond online shopping, consumer demand for information and entertainment over the internet has also grown. This was evidenced by the increased viewership across major video streaming platforms in Mainland China. For instance, consumers spent substantially more time browsing these major streaming platforms during the 2020 Chinese New Year holiday compared with the same period in 2019, according to data released by these service providers.
All these point to a shift in consumer behavioural patterns due to the pandemic.
The arrival of 5G has presented some new and interesting investment opportunities. For instance, 5G is likely to encourage higher online traffic and data consumption, which in turn should increase the need for related telecommunications equipment such as data servers, switches, and routers. At the same time, manufacturers of certain electronic components that go into 5G-related infrastructure (such as printed circuit boards), could also benefit.
Separately, further investment by the Chinese government into network security and data centres as part of the government’s new economy development plan is likely to benefit mainland Chinese network equipment manufacturers.
Given concerns around ongoing US-China tensions, coupled with supply chain disruptions due to the pandemic, many companies have taken matters in their own hands to reduce the uncertainty around supply chains and manufacturing. Many are investing into R&D to overcome previous technological bottlenecks and bringing production lines back to Mainland China to better serve the domestic market. A more domestically focused approach over the medium term signals a move in the direction of ‘de-globalisation’.
In order to fund this investment into R&D and new supply chains, these companies can take advantage of China’s increasingly developed capital market. For example, the STAR Market (Science and Technology Board) that was launched in 2019 should help technology-focused companies raise funds and should bring new investment opportunities for investors.
Furthermore, with the recent announcement by a fintech giant for a dual listing in both the Hong Kong (offshore) and Shanghai (onshore) market, we believe market-leading technology companies could become symbols of China’s new economic development and are worth keeping an eye on.
With technology stocks having made substantial gains in 2020, investors may be concerned about current valuations and a potential correction in markets.
While the rapid rise in the market in 2020 does raise risks in the short term, the backdrop of low interest rates and buoyant liquidity conditions post central bank easing does provide support for equity markets and higher valuations.
Moreover, new economy companies are likely to show more sustainable earnings growth compared to traditional economy companies, helping to justify their higher valuations. However, investors need to be mindful of signs of inflation in the market and any tightening of liquidity by global central banks, as these changes could shift the outlook for interest rates and hence, risk appetite in the market.
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
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