EMERGING MARKETS Is China’s technology sector primed for a big recovery?

Is China’s technology sector primed for a big recovery?

Beijing is easing its tough regulatory stance on the country’s tech and internet firms

News that China is easing its crackdown on the domestic technology sector could help boost the overall market and increase innovation in the world’s second largest economy.

Technology stocks still dominate the Chinese stock market despite recent pressure on their share prices linked to a rotation out of growth shares and Beijing’s tighter line on regulation.

More than 30% of the MSCI China index relates to a handful of names in the e-commerce and internet platform space, including Tencent (0700:HKG), Alibaba (9988:HKG), Meituan (3690:HKG), JD.com (9618:HKG), NetEase (9999:HKG) and Baidu (9888:HKG).

A report from the International Monetary Fund in June 2021 noted: ‘China has many of the ingredients that contribute to innovation – a large domestic market; high spending (2.4% of GDP) on research and development; millions of scientists, engineers and software developers graduating every year; and gradually improving intellectual property protection.’

A more supportive regulatory backdrop could help unlock these advantages and deliver a more innovative domestic economy.

While the MSCI Emerging Markets ex-China index has a decent allocation to tech, it has a more than 35% weighting towards financials and materials, industries which have dominated for a long time in the developing world.

These two sectors combined make up less than 20% of the MSCI China index.

China has a lot of big tech names

MSCI China top 10 constituents

Company

Tencent Alibaba Meituan China Construction Bank JD.com Netease Ping An Insurance Baidu ICBC Bank of China

Index weighting

4.6%

3.4%

2.7%

2.1%

1.9%

1.8%

1.6%

1.5% 8.8%

Table: Sharesmagazine.co.uk • Source: MSCI, data as at 31 May 2022 12.5%

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

Emerging markets: Views from the experts

Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

1. Chinese policymakers signalled an easing of their year-long crackdown on the information technology sector in May 2022. This has raised expectation that the record penalties and constraints on doing business in the sector are moving into the rear-view mirror. An example of the policy changes included the People’s Bank of China’s announcement of a return to ‘normalised supervision’ with respect to the technology sector’s financial activities. In addition, premier Li Keqiang also signalled stronger support for the standardised and healthy development of the platform economy. Although uncertainties remain, the easing of the crackdown on the information technology sector is a positive development for investors. within 72 hours to access public spaces, including transport, offices and shopping centres. The challenge for businesses is how to encourage consumers out of their apartments and into the shops given the new requirements, which some view as cumbersome. One winner could be the platform economy as consumers opt to purchase even more goods and services online.

3. Elevated commodity prices have positively impacted emerging markets including Brazil, which is a net commodity exporter. However, the dark side of resource nationalism is starting to emerge, with markets including India, Malaysia and Indonesia implementing bans on the export of grain and other agricultural commodities. Designed to control domestic inflation by increasing supply, this can have the opposite effect as producers reduce production driven by a margin squeeze created by rising input costs and falling revenue due to excess domestic supply. Other emerging markets are trying to find ways to address looming global food price increases through a range of measures aimed at reducing inflationary pressures, including the release of Ukrainian grain trapped in storage and lowering fertiliser costs.

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT) Porfolio Managers

2. While China continues to pursue its ‘dynamic zero’ Covid policy, it is adapting how it lives with the virus. Cities are transitioning to a policy of requiring a negative test

Chetan Sehgal

Singapore

Andrew Ness

Edinburgh TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.