Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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China’s consumer and technology sector in strong momentum
Peter Garnry
Chief Investment Strategist
Summary: In today's equity note we highlight our China consumer & technology basket which is now the second best performing theme basket over the past year. Risk sentiment has naturally shifted higher as the Chinese government lifted its Covid restrictions and today the entire sector got another boost as Alibaba revealed a new plan to split into six separate businesses to unlock value. While we remain long-term cautious on Chinese equity returns there is no doubt Chinese consumer and technology stocks look increasingly like a tactical bullish play.
Alibaba jumps on new divestment strategy
China’s largest e-commerce company Alibaba announced today that it will create a new organizational and governance structure splitting the conglomerate into six separate businesses. The overall architecture will be explained by management on a conference call tomorrow. In the brief press statement Alibaba says that the move is done to unlock value and this of course the standard breakup phrase when conglomerates split up, but the move also aligns Alibaba with the government’s anti-competition laws. Since 2021, Alibaba has been at the centre of Chinese technology regulation and selling off assets have on the table ever since. The Chinese government want to prevent Chinese technology companies from exercising cross-subsidisation between business units and locking in consumers in their eco-systems. The natural evolution is that Tencent and Baidu might pursue similar moves in the future.
Alibaba will split the business into six units: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group and Digital Media and Entertainment Group. The divestment will undoubtedly simplify the business lines and unlock value, in addition to lower the regulatory threats. The publicly listed company will be the China e-commerce business which is 68% of total group revenue with the remaining units becoming privately owned in the beginning but Alibaba will explore the opportunity to list these units. Alibaba shares rose 13% in Hong Kong trading on the news and the main question is whether this is another catalyst that will make Chinese technology stocks a winning trade this year.
Are Chinese consumer and technology stocks a must trade in 2023?
Chinese investment assets saw an increased risk premium in the aftermath of the Russian invasion of Ukraine and this risk premium has largely remained in Chinese equities. More government involvement in the economy, technology regulation, a real estate development crisis, and the low growth due to the lockdown did not help either. Our position has been that Chinese equities will not be a long-term winner for investors and this remains our view, but the Chinese reopening is creating short-term opportunities.
Our China consumer & technology basket is up 7.2% over the past year making it the second-best performing theme basket in our universe of 24 theme baskets. Only the defence basket has done better up 14.8%. Luxury stocks which we recently wrote about has been one way foreign investors have expressed a positive view on the Chinese reopening. For those investors that are willing to take additional risks, Chinese consumer & technology stocks listed on Chinese exchanges are an option. The relative and absolute momentum suggests that Chinese consumer and technology stocks could become the winning trade this year. It will likely require that the global economy avoid a recession and that the Chinese government continues to support the private sector.
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