While Chinese tech company Huawei seems to be the current “fall guy” in the trade war between the US and China but this does not mean that Asian tech stocks should be avoided en masse, according to Invesco’s William Lam.
The trade tensions between the two economic powerhouses dominated markets in 2018 as they brought in tit-for-tat tariffs on each other goods and dented investor sentiment in the process.
Concerns eased at the start of 2019 while progress seemed to be made in talks around easing the dispute but this period of calm was brought to an end in May when US president Donald Trump said that the previous tariffs of 10 per cent levied on $200bn worth of Chinese goods would be raised to 25 per cent. China responded with tariffs on $60bn of US goods.
Chronology of recent US-China trade tensions
Source: AFP - Agence France Presse
One of the main reasons for the US’s stance towards China, according to William Lam, co-head of Asian and emerging market equities at Invesco, is that the US “feels threatened” by Chinese advances in technology.
“Possibly the stickiest sticking point in negotiations between the two sides is around China’s ambitions here. Whether it be in 5G telecom networks, face recognition technology, semiconductor design and manufacture, autonomous driving or artificial intelligence, China’s rapid development is obvious to all,” he explained.
“Six months ago, I had the chance to meet a professor of artificial intelligence at Oxford University and I asked him about the progress of China in his field. While he was clear that China was still very much behind the US, he also clearly believed in the inevitability of China catching up in the foreseeable future.”
Lam said this shows that China’s threat to US tech dominance is real even if that threat might be not be immediate. And one of the main targets of the Trump administration in the trade war appears to have been smartphone maker Huawei.
Huawei and its affiliates were put on a trade blacklist by the US. This bans the from sharing technology from US firms without government approval.
Trump also claimed the company was a security risk, telling reporters last week: “Huawei is something that is very dangerous. You look at what they've done from a security standpoint, a military standpoint. Very dangerous.”
Companies from outside of the US are also stepping back from the firm. UK-based microchip maker ARM is an example of a major player that has said it will suspend business with Huawei.
Invesco Asian’s holdings and sector allocation – May 2019
Source: Invesco
Lam described Huawei as “one of the most impressive Chinese tech companies” and one that seems to be on a similar development path to South Korea’s Samsung by establishing domestic dominance in end products like handsets, expanding overseas and then vertically integrating by moving upstream into semiconductor design.
“The reason why Huawei is so impressive is that it seems to be one of the few companies in China which has made good progress in its in-house semiconductor design – its high-end handsets (which continue to gain share globally) are powered by its own semiconductors and have technical specifications genuinely rivalling Samsung,” the Invesco manger added.
“All this means that one of the things we are most worried about in the long run for our investment in Samsung is the progress of Huawei (and other Chinese tech firms), especially as they have all the capital backing from the government that they need.”
As the table above shows, Lam has a significant weighting to information technology stocks in his £2.6bn Invesco Asian fund, while Samsung is its largest individual holding.
The manager added that it is a legitimate question to ask why the portfolio is overweight Asian tech stocks when this sector seems to be at the very centre of the US-China trade war.
“Samsung is our largest holding in the tech sector and could well benefit from any difficulties that Huawei faces, whether that be in short term relief from Huawei’s progress in handsets, or long-term relief from Huawei’s (or other Chinese companies’) progress in semiconductors,” he explained.
He also argued that the long-term impact of the trade war on Taiwanese companies Taiwan Semiconductor Manufacturing and Mediatek – which can be found in Invesco Asian’s top holdings – is “not obviously negative”.
Taiwan Semiconductor Manufacturing, the manager argued, holds a virtual monopoly in its space. Both Chinese and US technological development are reliant on the firm as it supplies their important microchip industries.
Meanwhile, Mediatek competes indirectly with both Huawei and US company Qualcomm, who could be a target of China’s retaliatory measures. “So, in my view, Mediatek has the potential to gain market share in the current environment as it is neither Chinese nor American,” the manager concluded.
Performance of fund vs sector and index under Lam
Source: FE Analytics
Lam has managed the Invesco Asian fund since April 2015, over which time it has made a 54.84 per cent total return. This is around 20 percentage points higher than its average IA Asia Pacific Excluding Japan peer and its MSCUI AC Asia ex Japan benchmark; it is ranked fifth out of 91 funds in the peer group over this time frame.
The fund has an ongoing charges figure (OCF) of 0.95 per cent.