The fall in Chinese technology stocks this year is largely due to a crackdown from Chinese regulators. Concerns about the amount of personal data they control and who has access to that information has seen a clampdown on firms.
However, now these tech companies are facing a further two-pronged attack. First, there are reports that Chinese regulators are going to prevent companies from listing on overseas stock markets. Second, the US Securities and Exchange Commission is currently finalising a key piece of legislation. It will force Chinese firms to comply with audit requirements or face delisting from US stock exchanges.
Both of these moves will negatively impact their shares prices. On Friday as I wrote this, JD.com and Pinduoduo were down over 9% each. DiDi, a ride-hailing app was down over 15% on news that it plans to delist from the NYSE.
That said, I’m optimistic about the long-term prospects of internet and e-commerce companies in China and other emerging markets. Mobile internet use is growing, there’s a burgeoning middle class and in many developing countries, a young population.
Therefore, I’m once again considering if I should take advantage of this long-term trend by buying an ETF that’s been on my radar for several months.
The ETF
ETFs (exchange traded funds) track an index or sector and can be bought and sold like a share through most online brokers.
The fund I’m looking at is HANetf Emerging Markets Internet & Ecommerce UCITS ETF GBP (LSE: EMQQ), which tracks the EMQQ The Emerging Markets Internet & Ecommerce Index.
That means it tracks companies across a wide variety of industries including online shopping and software. A broad range of countries is also taken in along the way, such as Brazil, China, India and Turkey.
For selection, the firms must be publicly listed, derive their earnings from online activities in emerging markets and have a market cap of $300m+. Recognisable companies include Alibaba and Tencent.
This fund should provide me with exposure to the online world that’s growing fast in emerging markets. With a twice-yearly review of the index, I’ll also benefit from any new entrants to this sector.
Am I going to invest?
Over the last year, this ETF is down over 20%. Indeed, on Friday it was down over 5% alone. It’s this type of price action that appeals to me. The price of this ETF has fallen because the Chinese tech stocks generally have been hit hard. but I don’t think this can go on forever. If the long-term trend is as I expect, then this really could be a bargain buy for me.
However, for my portfolio, I’m still hesitating.
Although some investors may disagree, I still question just how diversified this fund actually is. Though the fund is meant to be diversified in terms of countries, I continue to feel it’s far too weighted towards China for my liking. The top five Chinese holdings account for over 35% of the fund.
Presently, as there’s so much uncertainty about Chinese technology stocks and their regulation in both China and the US, I’m more comfortable watching and waiting from the sidelines.
