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JIMMY MOYAHA: If we anticipated that this year would commence without major events, reality is proving to be quite the opposite – it’s shaping up to be a fascinating period. Just yesterday, the US released a statement regarding the inclusion of Tencent on a blacklist, which reverberated throughout Asian markets and had a considerable effect on South African markets, the aftershocks of which are still being felt today.

I’m speaking with Henry Biddlecombe, head of asset management at AG Capital, to analyze this situation and understand what is transpiring. Good evening, Henry. Thank you for being with us. The US statement appears quite troubling. Is there reasoning behind it? Does it carry significance, and what was specifically communicated?

HENRY BIDDLECOMBE: Hi, Jimmy. This is certainly crucial for South Africa, especially since Naspers is the largest stock on our exchange, carrying more weight for us than for many other global entities.

As for the rationale behind the statement: I believe it’s somewhat procedural.

Basically, the US Department of Defense has added Tencent to a watchlist alongside various other Chinese companies that may have ties to their military – specifically, the People’s Liberation Army.

And understandably, that’s a situation a nation like the US would want to keep a close watch on.

JIMMY MOYAHA: As you indicated, this doesn’t seem entirely unexpected from the US perspective. Are there any Chinese companies that are yet to find themselves on this watchlist?

HENRY BIDDLECOMBE: Yes, the list isn’t particularly long. It doesn’t suggest that these companies are an immediate danger to national security.

We really have to grasp how China operates. Its operational structures are vastly different from those of the typical Western countries that you and I may know better.

The line between military and civilian enterprises in China is often blurred. The Chinese Communist Party, by law, requires that all companies cooperate with the People’s Liberation Army.

This means that any data or resources held by a Chinese enterprise must be accessible to the Chinese military.

Considering that a corporation like Tencent possesses extensive data, a large user base, and considerable technological prowess, it could certainly be beneficial for military applications in various scenarios.

JIMMY MOYAHA: This resonates with much of the dialogue we observed last year regarding ByteDance and its subsidiary TikTok, particularly in relation to data privacy concerns.

Could this indicate the onset of a new aspect of the trade conflict?

I’m reminded of the tensions that arose during and after the pandemic regarding US-China trade relations – the wide-ranging implications that followed. Is this merely a new facet of that conflict, or an escalation of the existing one being fought in the digital domain?

HENRY BIDDLECOMBE: You’re definitely steering the discussion in the right direction.

This reflects the escalating geopolitical tensions between the two countries, especially with a potential Trump administration on the horizon.

I expect we’ll see more developments like this, rather than fewer.

Moreover, Chinese technology firms have faced significant scrutiny for several years. What began as a stringent regulatory crackdown in China now seems to be accompanied by growing tensions between the two superpowers.

While the Nasdaq and US tech sector have soared nearly 100% over the past five years, China’s sector has remained stagnant.

So one must ask: given such concerning news, do these stocks present an opportunity due to their low valuations? Should I divest from US tech in favor of Chinese tech?

That’s a compelling question to ponder.

JIMMY MOYAHA: I’m eager to hear your thoughts on this matter, Henry. As an asset manager with AG Capital, who oversees global markets, do you consider the current pressures on China to be excessive or unjustified? Or is it merely the result of the US continuing to shape the narrative?

HENRY BIDDLECOMBE: Your questions today are very astute.

Reflecting on the past five years, I would contend that China should and likely will trade at a notable discount in relation to the US in the long term. The debate lies in determining just how significant that discount should be.

Do I perceive Chinese tech as a relative opportunity at this moment? Absolutely.

This leads me to propose a strategy of shorting US tech while going long on Chinese tech as a tactical move for now.

JIMMY MOYAHA: In relation to US technology, with the recent surge in companies such as Nvidia, how do we foresee these geopolitical tensions impacting global tech sectors? A significant portion of China’s resistance has been regarding restrictions on certain essential materials required by firms like Nvidia for their products.

I’m concerned that South Africa might find itself amidst the fallout if we aren’t vigilant. How should we approach the tech investment landscape?

HENRY BIDDLECOMBE: This sector is critical on a global scale, yet it is also highly concentrated.

Only a selective few companies possess the capability to manufacture the silicon and chips necessary for advanced AI technology.

As for practical measures, I must admit it’s complicated. Both nations may aim over the next decade to create somewhat independent supply chains. However, at present, the entwined connections complicate the potential for that change.

JIMMY MOYAHA: It appears we are indeed dealing with a rather intricate situation.

Before we wrap up, Henry, how can we, as South Africans, lessen the impact of these developments? It appears we may encounter a volatile year ahead.

HENRY BIDDLECOMBE: When evaluating our broader market, we aren’t particularly exposed in this context.

Our stock market is surely influenced by the state of the Chinese economy.

However, regarding the specific tensions between the US and China, my suggestion is that these may generally lead to a net adverse outcome for us.

Nevertheless, I feel there’s greater risk in equity markets at this point compared to the past five years, so it’s wise to exercise caution and avoid major risks.

My inclination would be to favor China over the US from a six-month to twelve-month outlook.

JIMMY MOYAHA: It looks like we’re heading toward a tumultuous journey, with several challenges to face. Thank you very much, Henry, for your insights and for joining us today. That was Henry Biddlecombe, head of asset management at AG Capital, here with us to discuss the US Defense Department’s decision to place Tencent on their watchlist and its consequences for our markets and beyond.

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