Geopolitical and regulatory hurdles leave tech stocks highly vulnerable

Market turmoil continued last week and although inflationary pressures dominated headlines, a potential Russian invasion of Ukraine and its impact on energy prices have not helped matters. Geopolitical and regulatory tensions with China are also ramping up again, especially with its Winter Olympics coming to a close. With the spectre of a cold war looming large, especially as China and Russia seem to have forged a strong alliance more recently, we think calls by some investment banks that Chinese stocks have already bottomed seem totally out of touch with the geopolitical realities we are facing today.

Interestingly, US has added Alibaba’s unit, AliExpress and Tencent’s WeChat on its Notorious Piracy Market list. Meanwhile, China’s new crackdown on high prices of domestic home delivery of foods led to a significant drop in share prices of Meituan and others involved. Moreover, news that the Irish data protection authority, a watchdog for Silicon Valley’s Big Data, is soon to weigh in on the legality of operations of Facebook, Google and others which transfer swathes of user data to the U.S. has quickly become another major worrying point.

It is thus not surprising that Nasdaq Internet CTA Index which is seen as a good gauge for the new world economy and incorporates share price of many of global internet giants, including Chinese ones, remains on a steep correction trend with the index having fallen by over 20% YTD. Whether, these political and regulatory pressures will eventually cut spending on the cloud remains to be seen but the danger here is that it could spill over to curtail spending on hardware and specifically, semiconductors.

Indeed, we continue to believe that we will likely see more export restrictions of capital goods to China. With over 30% of order backlogs of Japan’s semiconductor-related materials and manufacturing equipment makers coming from Chinese chip makers, such broadening of prohibition of technology exports to the region will prove highly disruptive and could lead to big order cancelations. 

One name high in our list of short sell picks which is exposed to most of these issues is Softbank (9984) which from a top-down view looks to be facing a perfect storm, from a drop in value of internet names which it has a substantial holdings in, to the drying up of the IPO markets. With Nvidia’s acquisition of Softbank’s ARM unit now scrapped, we also think the value of ARM will come into question as we are likely to see a major legal battle surfacing between the UK firm and its Chinese subsidiary which has gone rogue and has claimed ARM’s IP as its inheritance.