A Rebound in Chinese Tech

From mid-February to mid-April, Chinese tech underperformed US tech by approximately 33%  (peak to trough).

Chinese tech had a perfect storm of regulation, tighter monetary policy, and several Chinese tech ADRs getting caught in the fire sale that was Archegos Capital Management.

That said, if I am true to my thinking of mean reversion for global risky assets within the constructive beta framework, it is now time to look at owning Chinese tech again.

1. While the technology regulation narrative that has dominated thinking in recent months is here to stay, it is a “known known”.
2. Outside of a rising cost of funding, a risk for all global assets, US equities face an ever-increasing risk of higher taxes that are yet to be addressed by investors. I believe it is safe to say that this will eventually be a drag on US tech multiples once this headwind crystalizes in the months ahead.
3. It is undeniable that there is a sizable valuation discount in Chinese tech versus their US peers.
4. Outside of the regulatory headwind, Chinese companies continue to produce results.
5. As the months go by, the market will focus on several high-profile Chinese IPOs that will likely list in Hong Kong later in the year. Rather than concentrate on the supply concerns, IPOs of Didi and Bytedance will shine a light on the quality of Chinese tech and its underperformance in 2021.

The balance of 2021 could be challenging for those seeking alpha. A rising tide lifting all boast makes it difficult to stand out for managers who have, in the aggregate, performed very well so far this year.

I suspect that the “easy” alpha has already been made, which means managers will need to be nimble and focus on sectors and markets that look primed to mean revert.

Last week I wrote about markets returning to some form of normality. We often discuss a world returning to normal.

What does travel look like? The workplace and the ways we will entertain ourselves? What is not discussed is whether or not we will see market constructs return to where they were pre-pandemic. When normality returns, so will mean reversion.

China tech should be one area where investors should witness mean reversion in the months ahead.

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