BlackRock trims Alibaba, Tencent, Meituan on ‘ongoing’ China tech crackdown and valuation risks, adds financials, energy in reflation bets

BlackRock has reduced its holdings in Chinese technology stocks over the past three quarters, and added banks in economic reflation bets
The world’s largest fund manager is still positive on Chinese stocks because of recovery upside, ready to add tech on better valuations

Stocks

Zhang Shidongin Shanghai

Published: 7:45am, 22 Apr 2021

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BlackRock, the world’s biggest money manager, has trimmed its holdings of Chinese technology stocks over the past three quarters because of “ongoing” regulatory tightening, while scooping up stocks that stand to benefit from a global economic recovery.

A months-long antitrust investigation into e-commerce industry practices led to a record US$2.8 billion fine on Alibaba Group Holding this month, stoking concerns more companies could be hauled up. Many of the 34 sector leaders have pledged to comply after being summoned for a meeting on April 13.

The internet-related sector is growing too fast and is likely to be reined in to ensure a healthy pace of expansion, according to Lucy Liu, a money manager at BlackRock, the New York-based fund management giant with US$8.7 trillion in assets globally.

“Whether it’s over yet? Probably not,” she said during a webcast presentation on Wednesday. “I think it will very much be on an ongoing basis. The sector is growing too fast and strong after the pandemic. It’s taking shares from the whole society.”

Lucy Liu, manager of US$1.64 billion BlackRock China Fund. Photo: BlackRock handout

The sector’s grip on the economy and reach in society are likely to lead to heightened scrutiny from policymakers with a view of regulating the sector, in the bigger context of regulation in many other industries. The move, Liu said, was to ensure they can still continue to grow healthily.

Liu has trimmed her bets on technology stocks since the second half of last year in the US$1.64 billion BlackRock China Fund under her management since May 2019, saying that increased competition and stretched valuations had also chipped away at their investing appeal.

While major technology stocks were still among the top 10 holdings at the end of March likely due to index tracking, their share of the fund’s assets had declined since August, according to fund reports. Tencent’s share dropped to 7.02 per cent from 9.4 per cent, for example. Its bet on Alibaba, the owner of South China Morning Post, fell to 4.5 per cent from 9.8 per cent, while Meituan took up 4.2 per cent versus 5.6 per cent previously.

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The Hang Seng Tech Index, a gauge tracking many of China’s technology bellwethers listed in Hong Kong, slumped by as much as 24 per cent this year, wiping out US$240 billion in market value. Tencent Holdings and Alibaba, Asia’s most valuable technology companies, have dropped at least 20 per cent from their peaks.

Liu added stocks along the economic reflation theme, including banks, energy and raw material producers and high-end manufacturers since the fourth quarter. China Construction Bank was the fund’s top holding at the end of March, according to its latest fact sheet.

Her fund has gained 5.2 per cent so far this year, trouncing 85 per cent of its peers, according to data compiled by Bloomberg. The portfolio tweaks probably helped it finish 2020 with a 46.6 per cent returns versus 16.5 per cent in 2019. The fund has risen 189 per cent since its June 2008 inception.

Liu’s view is in contrast with that of Oliver Cox, a top-performing fund manager at JPMorgan Asset Management. Investors are making mistakes by viewing political and regulatory risks as a short-term issue, because China is keen for its best technology companies to flourish, he said.

Cox cited lessons from the 2018 US-China trade war and later the technology cold wars that eventually faded, and gave way to a massive run-up in the next two years.

Technology stocks still remain on Liu’s radar and will be added when opportunities arrive and valuations are more appealing.

“Whether the sector remains interesting? Yes, of course,” she said. “These are all high-quality companies and we are actually closely monitoring the sector and waiting on the sideline to find a better entry point when the expectation is reset.”

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