Chinese technology crackdown and the necessity of cyber security

Chinese technology crackdown and the necessity of cyber security

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Only two equity theme baskets did better than the MSCI World Index highlighting the trouble many growth pockets have experienced in July despite falling interest rates. Cyber security was the best-performing basket up 5.1% driven by strong demand and positive news sentiment with the Biden administration signing an executive order on cyber security. The worst-performing basket was our China Consumer & Technology basket down 11.9% driven by a crackdown on its for-profit education industry and wider technology industry, as the country wants to ease inequality and steer the country towards other technologies within renewable energy and semiconductors.


July was a bad month for our equity theme baskets with all baskets performing worse than the MSCI World expect cyber security and battery showing that popular themes were avoided in July over concerns of lower growth related to the Covid-19 Delta variant. It is a bit unusual is that the declines across many of our growth baskets came despite a 25 basis point drop in the US 10-year yield in July which has typically lifted these pockets. It underscores that the underlying concerns about economic growth are currently weighing more than a slightly lower discount rate on cash flows.

02_PG_3
Source: Bloomberg
02_PG_4

The biggest news in July was China’s crackdown of its for-profit education system and its recent wider technology crackdown aiming at improving competition, limit misuse of privacy data from technology giants, and in general steering the economy away from technology platforms and towards technologies solving the environment and self-reliance in terms of semiconductors and other key technologies. China is moving away from the previous economic growth at all-costs model emulated on the US/Hong Kong success to that of Germany with a much deeper focus on high-end technology clusters working together and with more frugal values emphasising less on consumption. The new trajectory is also hitting Chinese IPOs in the US and caused a 11.9% decline in our China Consumer & Technology basket in July driven by foreign investors recalibrating their exposure to emerging markets and China.

Cyber security was the big winner in July up 5.1% driven by positive news sentiment and strong earnings momentum for the industry. Last Wednesday, Biden signed an executive order on cyber security which aims at upgrading the US on cyber security efforts and ensure the US is prepared for cyber-attacks which recently included the big Colonial Pipeline which is critical US infrastructure.

Q2 earnings look solid with little fears over commodities

The earnings season has so far been quite strong driven by mega caps beating estimates. MSCI World Q2 EPS is up 6.4% q/q and Nasdaq 100 EPS is up 7% q/q showing that rapid nominal GDP growth is flowing through to corporate earnings. Most companies are mentioning the ongoing global supply chain disruptions as hurting their business, mostly in terms of the potential, and few is worried about commodity prices except for Unilever saying they are feeling the pressure on operating margins. This might be an early warning of what to come, but for now we believe higher commodity prices and their potential negative impact on corporate earnings is a Q4 earnings season worry. As the earnings chart below shows, earnings have fully recovered and are now well above their pre Covid-19 level.

02_PG_5

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.