Recent regulations in the Chinese online gaming industry corroborate our view that while long-term value has emerged for the Chinese technology sector, it is premature to call a bottom due to the ongoing regulatory overhang.
Last week, we saw more price volatility in China’s major technology companies as a news report by the South China Morning Post stated that Chinese regulators had suspended new game approvals. The Hang Seng Tech Index fell 4.5% while Tencent and NetEase fell by ~9% and ~11% respectively.
The South China Morning Post, however, subsequently clarified that the regulators were temporarily slowing new online games approval rather than halting them completely. The clarification helped the Hang Seng Tech Index to retrace 2.9% last Friday, while Tencent and NetEase regained slightly over 2%.
The media report made note that the Chinese regulatory body, the National Press and Publication Administration (NPPA), did not publish its list of approved games for the month of August, when it typically approved 80-100 games per month previously.
It also reported that regulators have reminded the companies to “strictly enforce” the NPPA’s latest rule on limiting time spent on gaming by Chinese youths below the age of 18. Tencent subsequently announced that it would postpone the new launch of one of its games to 1 October.
In addition to the regulatory cloud, we continue to see Chinese authorities take a carefully calibrated approach to loosening its monetary policy stance in response to the soft patch in economic growth due to the Delta variant.
The August total social financing (TSF) report for China showed a relatively mixed picture of the state of credit and financing.
The headline TSF grew by 10.3% year-on-year, slightly below the 10.7% growth in the previous month of July. The money supply M2 grew by 8.2% YoY, versus 8.3% YoY in July. Peering beneath the headline, the quantum for new bank loan creation came in below market expectations at CNY1.22 trillion compared to consensus estimates of CNY1.5 trillion.
On the positive side, we saw a notable month-on-month pickup in bond financing in the economy, which was good news. Net financing for both government bonds and corporate bonds increased relative to the month of July. The quantum for net government bond financing of CNY974 billion was significantly higher than the CNY182 billion in the previous month, in line with the state’s guidance in a recent policy working group meeting that it would be stepping up local government borrowing to provide fiscal support.
Despite volatility in China’s technology sector due to continued regulatory overhang, risk-reward in Chinese equities appears mostly balanced at this juncture with more attractive valuations in play, says our Head of Investment Strategy Eli Lee. This situation underpins our neutral weight stance in Chinese equities at present.
Elsewhere in Asia, Japan’s Prime Minister Yoshihide Suga announced on 3 September that he would not be contesting in the ruling Liberal Democratic Party’s leadership contest taking place on 29 September, effectively signalling that Japan will see a change in premiership by the end of this month. This has triggered a rally in Japanese equities, on the back of light investor positioning and lagged performance year-to-date.
Prime Minister Suga’s decision came after a decline in approval ratings for his cabinet over the past twelve months since his appointment, which continued to fall even after the conclusion of the Tokyo Olympics. The Japanese public were dissatisfied with his government’s handling of the Covid-19 pandemic, and the decision to go ahead with the Olympics.
Investors are hopeful that the new prime minister would announce a larger supplementary budget and deliver a much bigger fiscal boost to the economy. The Nikkei has gained 8.2% month-to-date, relative to the -0.5% decline of the MSCI All-Country World Index. The majority of the gains (~6.4%) came after Prime Minister Suga’s announcement.
This has primarily been a catch-up play for Japanese equities, which have lagged global markets significantly over the year. While there is much to hope for, the reality is that we will need to see more concrete developments in terms of success in addressing the Covid-19 situation in Japan and also additional stimulus policies from policymakers.
While there is scope for a further tactical bounce in Japanese equities towards the general election in November this year, we believe investors should take a nimble, bottom-up approach to the Japanese market, especially as the Delta variant remains a concern.
In the US, our base case remains that the Fed is likely to announce in November that it will begin to taper its quantitative easing program in December ending in mid-2022.
It is our view that a taper announcement in 4Q 2021 is mostly priced into market by now, and that the Fed will continue to prime investors for the announcement ahead to prevent a reprisal of the 2013 taper tantrum.
In line with this, we saw an influential Wall Street Journal article last Friday (10 September 2021) titled “Fed Officials Prepare for November Reduction in Bond Buying” which indicated that Fed officials would “seek to forge agreement at their coming meeting to begin scaling back their easy money policies in November”.
The article went on to suggest that “under the plans taking shape”, the Fed could conclude the tapering “by the middle of next year”.
Our house view for a reduction pace of ~USD15 billion per month once taper commences would be in line with this assertion, although considerable uncertainty remains. The article noted that the Fed officials “still have to iron out the exact pace of any taper”.
This remains broadly supportive for risk assets for the next 12 months, in our view, especially given our base case that the outbreak related to the Delta variant of the Covid-19 pandemic is unlikely to derail the global economic recovery.
In our view we continue to hold a moderate pro-risk stance with an overweight position in US equities. In fixed income, we remain overweight in Emerging Market High Yield bonds, where valuations still look relatively attractive and should offer a buffer against the adverse impact of rising rates compared to other fixed income segments. We stay underweight in both Developed Market and Emerging Market Investment Grade bonds.
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