Exploring the factors fueling a come-back in global technology stock

US equity market started the year with bang, as tech stocks and a surge for Facebook’s parent company led the market higher. Meta Platforms was helping to lead the way with a 23.3% leap after it reported better revenue for the latest quarter than analysts expected and said it expects to spend less this year than earlier forecast. Although its latest profit fell short of expectations, Facebook’s parent announced a program to buy back $40 billion of its stock, which puts cash directly in the pockets of shareholders.

Stocks had already been on the upswing through the start of the year on hopes that the Federal Reserve will soon pause its interest rate increases. The aim of the hikes is to help stamp out inflation, but they also hurt the economy and investment prices.

Stocks and bonds took off after Fed Chair Jerome Powell said the central bank is finally starting to see progress in its battle against inflation. Markets took that as a cue that a pause may be imminent, and investors even raised bets for a cut in interest rates late this year. Rate cuts act like booster for markets, and providing support for the economy.

China Technology Stock Rallies

China’s tech stocks have staged a strong rally as the country reopens and a regulatory clampdown on the sector loosens, drawing the attention of international asset managers who fled the market in recent years.

Hong Kong’s Hang Seng Tech index, which is stacked with Chinese companies, has soared almost 60 per cent from its lows last October, with heavyweights such as Tencent and Alibaba gaining in value.

The gains, which picked up late last year when China began lifting its Covid-19 curbs, sharply contrast a painful stretch for Chinese tech shares. Many big-name groups in the sector had their valuations dragged lower since 2021 by China's government measures. At the height of the crackdown, many foreign fund managers debated the extent to which Chinese equities were rendered “uninvestable”. 

Some of the strongest signals to buy this year have come straight from the Chinese authorities. They have begun taking small equity stakes in units of Alibaba and Tencent, formalizing the government’s role at the tech groups and signaling a wrap-up for the wider crackdown.

Authorities have also resumed approvals for sales of new video games vital to both Tencent, which makes up a huge chunk of Tencent's revenue, while ride-hailing group Didi has been given permission to sign up new customers after an investigation into the company forced it off Chinese app stores two years ago.

Portfolio Strategy & Performance

The portfolio recovered strongly with cash portfolio +3.8%, CPFIS +4.16%, SRS +2.69% for the month of Jan, thanks to a slow-down in inflationary pressure. We also performed a switch moving from Short Duration Bond to Emerging Market Equity to take advantage of the recovery of the Chinese Economy. 

Having said that, the recovery process will not be smooth, as any strong economic data from US will put into doubt that the inflationary pressure is easing.  For example, a red-hot January jobs report, with unemployment rate in US at a 53 years low, released on Feb. 3 sent the bulls back to cover. Having said that, the investment horizon looks much better than last year as the global economy has taken into the account of the Russian-Ukraine war, with all the world economies having moving out of the shadow of the pandemic and normalizing their economies. 

Once the US Central Bank indicate a definite end to the rate hikes, than all the good news will no longer be bad for the stock market, and continues the normalized investment paradigm, where good news should drive markets higher... not lower.