The U.S. and China are the two global leaders in technology, and the tech sector is the largest constituent in both countries’ stock markets. Deteriorating relations between the two superpowers, with tech dominance a key issue, are sparking investor concerns. Recent selling has fanned the flames. We see a focus on innovation and battle for supremacy as long-term positives for the tech sector in both countries. Yet key differences – in everything from sector composition to performance and valuations – call for a nuanced approach. We focus primarily on China, where a recent company tour provided valuable insight.
• Price reset. Recent selling in both Chinese and U.S. tech stocks has been painful, but we see it potentially creating more attractive entry points for long-term investors.
• Tech decoupling. We see U.S. and Chinese tech developing differently, a trend amplified by changes in trade, cross-country investment restrictions and the competition for dominance. This can mean two distinct opportunities for investors.
• Risk and reward. Chinese tech has lagged the U.S. in 2018 and valuations look compelling. Yet we are watching how trade disputes and strained relations affect Chinese IPO activity, global supply chains and cross-border investment.
U.S. tech is still up 10% year-to-date despite October selling, while China tech has plunged 28%, resulting in the largest relative performance disparity since 2004. See the chart below. This partly reflects downward revisions to Chinese tech earnings. Yet analysts project a rebound in 2019 amid strong demand, fiscal stimulus and waning regulatory hurdles. We also see China’s focus on domestic demand and a strategic commitment to self-reliance as potential positives amid trade disputes. U.S. tech earnings, meanwhile, are expected to normalize after a boost from 2018 tax cuts.
Tough times for Chinese tech
Performance of Chinese vs. U.S. tech stocks, 2000-2018
Kate Moore – Chief Equity Strategist, BlackRock Investment Institute
Lucy Liu – Research analyst, BlackRock Fundamental Active Equity
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