Heat is on for tech stocks amid U.S.-China cold war

The U.S. and China are the two global leaders in technology, and the tech sector is the largest constituent in both countries’ equity markets. Tensions between the two superpowers, with tech dominance a central issue, are sparking concern. Recent tech stock selling has only fanned the flames. We see a focus on innovation and battle for supremacy as positives for the tech sector in both countries. Yet there are key differences — which could mean two distinct opportunities for investors.

Equity highlights

• Price reset. Recent selling in both Chinese and U.S. tech stocks has been painful, but we see it potentially creating more attractive entry points for long-term investors.
• Tech decoupling. We see U.S. and Chinese tech developing differently, a trend amplified by changes in trade, cross-country investment restrictions and the competition for dominance. This can mean two distinct opportunities for investors.
• Risk and reward. Chinese tech has lagged the U.S. in 2018 and valuations look compelling. Yet we are watching how trade disputes and strained relations affect Chinese IPO activity, global supply chains and cross-border investment.

Snapshot

The tech sector is growing in both the U.S. and China, as shown in the Tech’s growing heft chart below. Yet the two are quite different.

Chinese tech is an innovative hub tailoring experiences and services for a distinct domestic user. It is at pivotal points in acquiring new customers and tapping into higher value consumption, with many industries battling for market share. Competition is fierce and the sector continuously disrupts itself. The Chinese are devoting considerable resources to the development of artificial intelligence, a key strategic priority, and are on their way to becoming a global leader in the space.

The U.S. tech sector is globally oriented and diverse. It maintains its stronghold in enterprise software and cloud services. It remains the global leader in semiconductors, though China’s ambitious plan to supply the majority of its own chips looms on the horizon.

We like both U.S. and Chinese tech longer term, and believe investors who choose one over the other may be forfeiting significant opportunity. A drive to innovate supports both, while cross-country restrictions could limit redundancy and direct competition, setting up distinct opportunities.

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