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JIMMY MOYAHA: If we believed this year would kick off without any major events, the truth is proving to be quite the contrary – it’s shaping up to be a fascinating period. Just yesterday, the US released a statement about blacklisting Tencent, which sent ripples across Asian markets and had a notable effect on South African markets too. The repercussions are still being felt today.
I’m on the line with Henry Biddlecombe, head of asset management at AG Capital, to dissect this situation. Good evening, Henry. Thank you for joining us. The US statement is rather troubling. Is there a valid reason behind it? Does it carry significance, and what was the message?
HENRY BIDDLECOMBE: Hi, Jimmy. This is undoubtedly crucial for South Africans, especially since Naspers is our largest stock. It weighs more heavily on us compared to many others globally.
Regarding your inquiry on its justification: I believe it is somewhat procedural.
In essence, the US Department of Defense has flagged Tencent along with other Chinese companies that may have links to their military – the People’s Liberation Army.
Understandably, that’s something a nation like America would want to officially keep track of.
JIMMY MOYAHA: As you mentioned, this isn’t entirely surprising from the US perspective. Are there any Chinese companies that haven’t made it onto the watchlist yet?
HENRY BIDDLECOMBE: Yes, the list remains limited. It doesn’t necessarily mean these companies pose an immediate threat to national security.
We must consider how China operates. Its approach differs significantly from what you and I might be accustomed to in Western countries.
The distinctions between military and civilian sectors in China are quite hazy. According to Chinese law, every company must assist the People’s Liberation Army.
Therefore, any data or resources held by a Chinese company must be accessible to the Chinese military.
You can appreciate that a company like Tencent possesses a massive amount of data, a broad user base, and advanced technological capabilities that could be beneficial for military applications in specific circumstances.
JIMMY MOYAHA: This resonates with much of the discussion we saw last year regarding ByteDance and its app TikTok, particularly in relation to data privacy issues.
Could this indicate the onset of a new phase in the trade war?
I recall the tensions during and after the pandemic surrounding US-China trade interactions – all the ramifications that followed. Is this simply a new aspect of that conflict, or an escalation of the current one, now fought in the digital sphere?
HENRY BIDDLECOMBE: You’re definitely steering the discussion in the right direction.
This highlights the escalating geopolitical tensions between the two countries, especially with a potential Trump administration on the horizon.
I expect we’ll see more of this rather than less.
Furthermore, the Chinese technology sector has faced immense pressure for a number of years. It started with a heavy regulatory assault within China, and now, they seem to be wrestling with escalating tensions between the two nations.
While the Nasdaq and the US tech market have surged nearly 100% over the past five years, the performance in China has stagnated.
One must ask: with such negative news, do these stocks become appealing due to their lower prices? Should I be selling US tech in favor of Chinese tech?
That’s a question worth pondering.
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JIMMY MOYAHA: I’m eager to hear your take on this, Henry. As an asset manager at AG Capital, which oversees global markets, do you think the pressure on China right now is excessive or unjustified? Or is it merely a consequence of the US continuing to dictate the narrative?
HENRY BIDDLECOMBE: Your inquiries today are very relevant.
Given the past five years, I would assert that China should, and likely will, trade at a notable discount compared to the US over the long term. The debate centers on determining just how substantial that discount should be.
Do I see Chinese tech as a relative opportunity currently? Absolutely.
This leads me to propose a strategy of shorting US tech and going long on Chinese tech as a tactical approach for the time being.
JIMMY MOYAHA: Considering US technology, particularly the rise we’ve seen in companies like Nvidia, how do we anticipate these geopolitical tensions will affect global tech sectors? Much of China’s resistance has been in response to restrictions on critical materials utilized by companies like Nvidia.
I’m concerned that South Africa might get ensnared in the crossfire if we’re not vigilant. How do we navigate this complex tech investment landscape?
HENRY BIDDLECOMBE: This sector is crucial globally, yet it remains highly concentrated.
Only a handful of firms can produce the silicon and chips necessary for cutting-edge AI technology.
As for actionable insights, I must admit it’s complicated. The two nations might endeavor to create somewhat independent supply chains over the next decade. However, for now, the connections are intertwined, making that a difficult goal to achieve.
JIMMY MOYAHA: It seems we are dealing with a rather intricate situation.
Before we wrap up, Henry, how can we, as South Africans, lessen the repercussions from these developments? It appears we’re facing a turbulent year ahead.
HENRY BIDDLECOMBE: In evaluating our broader market, we aren’t particularly exposed in this context.
Our stock market is certainly affected by the health of the Chinese economy.
However, concerning the specific tensions between the US and China, I would suggest this could generally have a net negative effect on us.
That said, I think there is heightened risk in equity markets right now compared to the last five years, so it’s wise to proceed cautiously and avoid substantial risks.
My inclination would be to prefer China over the US from a six-month to twelve-month viewpoint.
JIMMY MOYAHA: It looks like we’re set for a rather tumultuous journey, filled with numerous challenges to confront. Thank you immensely, Henry, for your insights and for being with us. That was Henry Biddlecombe, head of asset management at AG Capital, discussing the US Defense Department’s decision to place Tencent on their watchlist and its implications for our markets and beyond.
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