US Big Tech rides AI wave, but China tech is lost at sea
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U.S. BIG TECH RIDES AI WAVE, BUT CHINA BIG TECH LOST AT SEA
Enthusiasm around generative AI has clearly lifted U.S. equities, and specifically large-cap tech indexes like the Nasdaq 100 .NDX. However, Jessica Rabe, co-founder of DataTrek Research, says you wouldn’t necessarily know we had just seen the advent of a new disruptive technology when looking at Chinese tech stocks.
Using the KraneShares CSI China Internet ETF KWEB.K as a proxy, Rabe notes that Chinese tech stocks, peaked in February 2021 and have lost ~75% of their collective value since. In fact, KWEB is trading back at levels seen in August 2013 when it first launched.
Meanwhile, the Invesco QQQ Trust QQQ.O, as a proxy for the NDX, is down around 5% from its all-time high reached on July 10th. YTD, QQQ has rallied about 17% vs KWEB’s more than 3% loss.
So why hasn’t Gen AI helped Chinese tech shares like their U.S. counterparts?
"Chinese tech stocks have dramatically underperformed the Nasdaq 100 since 2021 because that’s when the local government began its widespread crackdown on private enterprise," writes Rabe in a note.
China’s local Big Tech companies experienced huge growth during pandemic lockdowns, similar to U.S. Big Tech shares.
"Unlike in the U.S., however, China’s centrally controlled government launched investigations, imposed fines and implemented new regulations in the years that followed to equalize the imbalance of power between the private and public sectors," Rabe says.
Thus, her view is that this more authoritarian paradigm has, as a result, curtailed both Chinese tech companies’ growth and investor commitment to the space.
Rabe's bottom line is that Chinese tech stocks are a cautionary tale in that strict regulations can overwhelm the benefits of a new disruptive innovation such as Gen AI.
"This sector needs a major policy change in order to generate better investment returns, but markets believe (correctly, in our view) that this is not likely happening anytime soon," she writes.
DataTrek remains negative on Chinese tech stocks.
With this, Rabe cautions that since the sector dominates its country’s broader stock market, and that China makes up almost a quarter of MSCI Emerging Markets, investors should not forget when considering broad EM investments, that struggling Chinese tech stocks also weigh on EM performance more generally.
(Terence Gabriel)
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