US Blacklisting of Tencent Strains Naspers’ Position

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JIMMY MOYAHA: Contrary to our expectations for a calm start to the year, recent developments suggest otherwise – there’s a lot to unpack. Just yesterday, the US released a statement regarding the blacklisting of Tencent, triggering a reverberation across Asian markets, which has also had a substantial effect on South African markets. The repercussions are ongoing.

I’m joined by Henry Biddlecombe, the head of asset management at AG Capital, to dissect this unfolding situation. Good evening, Henry. Thank you for being here. The US statement raises concerns. Is there a rationale behind it? Does it carry significance, and what message exactly was put forth?

HENRY BIDDLECOMBE: Good evening, Jimmy. This is indeed crucial for South Africans, especially since Naspers represents the largest stock on our exchange. Its implications weigh more heavily on us compared to many global markets.

In terms of justification: I believe it’s largely procedural.

The US Department of Defense has classified Tencent among other Chinese companies that might have ties to their military – specifically, the People’s Liberation Army.

Understandably, that’s something that the US would prefer to keep a close watch on.

JIMMY MOYAHA: So, as you’ve indicated, this isn’t a shocking move from the US perspective. Are there other Chinese entities that have not yet been added to this watchlist?

HENRY BIDDLECOMBE: Yes, the watchlist is relatively short. Its existence doesn’t necessarily indicate that these companies pose an immediate security risk.

We must recognize that China’s operational model is quite distinct from that of the Western countries we are familiar with.

The lines between military and civilian sectors in China are significantly blurred. By law, the Chinese Communist Party requires all companies to support the People’s Liberation Army.

This means that any data or evidence held by a Chinese firm must be shared with the military.

Given its massive user base and extensive data holdings, Tencent could provide valuable resources for military applications in certain circumstances.

JIMMY MOYAHA: This resonates with much of the debate we encountered last year regarding ByteDance and its platform TikTok, especially concerning data privacy issues.

Could this represent a new phase in the ongoing trade conflict?

I recall the tensions seen during and after the pandemic related to US-China trade relations – with all the implications that followed. Is this merely a new aspect of that rivalry, or is it an escalation, now being fought in the digital sphere?

HENRY BIDDLECOMBE: You’re definitely on point with that observation.

This underscores the escalating geopolitical tensions between the two countries, particularly with a possible Trump administration looming.

I expect to see more developments like this in the future, not less.

Additionally, the Chinese technology sector has been under immense scrutiny for several years. It commenced with stringent regulations within China, and now it’s becoming entangled with rising tensions between both nations.

While the Nasdaq and the US tech markets have surged nearly 100% over the last five years, China’s tech sector has stagnated.

This raises the question: with such negative news, are these stocks attractive due to their low prices? Should I consider selling US tech to invest in Chinese tech?

This is indeed a thought-provoking question.

JIMMY MOYAHA: I’m curious to know your thoughts, Henry. As an asset manager at AG Capital, which monitors global markets, do you perceive the pressure exerted on China currently as excessive or unjustified? Or is it simply a result of the US staying in control of the narrative?

HENRY BIDDLECOMBE: I appreciate your insightful questions today.

Reflecting on the past five years, I would argue that China should, and likely will, trade at a significant discount compared to the US in the long run. The crux of the discussion revolves around how large that discount should really be.

Do I consider Chinese tech to be comparatively attractive at present? Absolutely.

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

JIMMY MOYAHA: In light of the surge we’ve observed in US technology firms like Nvidia, how do we expect these geopolitical tensions to affect global tech sectors? Much of China’s pushback revolves around restrictions on certain critical materials needed for products from companies like Nvidia.

I worry that South Africa might find itself caught in the crosshairs if we’re not vigilant. How do we navigate this tech investment landscape?

HENRY BIDDLECOMBE: This sector is globally crucial; however, it remains highly concentrated.

Only a handful of companies are capable of producing the high-end silicon and chips necessary for advanced AI technologies.

When it comes to actionable responses, I admit it’s complicated. The two nations might strive over the next decade to create somewhat independent supply chains. Nonetheless, right now, the interconnections are too intricate to ascertain how feasible that is.

JIMMY MOYAHA: It seems we’re faced with a very intricate situation.

Before we wrap up, Henry, how can we, as South Africans, cushion ourselves against the impact of these developments? It appears we are set for a tumultuous year ahead.

HENRY BIDDLECOMBE: In evaluating our broader financial landscape, our exposure isn’t particularly high in this context.

Our market is certainly affected by the performance of the Chinese economy.

However, with specific regard to the tensions between the US and China, I would suggest that the net impact for us could generally be negative.

That said, I perceive heightened risk in equity markets today compared to the past five years, making it wise to be prudent and avoid substantial risks.

From a six to twelve-month outlook, I am inclined to favor China over the US.

JIMMY MOYAHA: It seems we are on track for a tumultuous journey with numerous obstacles ahead. Thank you very much, Henry, for your insights and for being with us today. That was Henry Biddlecombe, head of asset management at AG Capital, sharing his thoughts on the US Defense Department’s decision to place Tencent on their watchlist and its implications for our markets and beyond.

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