Interactive Investor

Tech rebound fires Scottish Mortgage towards record territory

24th August 2021 14:25

Graeme Evans from interactive investor

A number of Chinese and US tech stars have soared as the recent sell-off attracts bargain hunters.

China's best-known technology stocks, including Alibaba (NYSE:BABA) and Tencent (SEHK:700), have attracted a surge of buying interest after their recent sell-off on the back of a regulatory crackdown.

The index tracking Hong Kong's leading tech stocks fell by as much as 4.5% on Friday to extend a recent sharp downward trend, as leaders in Beijing pass more laws increasing the compliance burden for the technology, education and other sectors.

But this week has seen a significant rebound as bargain hunters take advantage of the lower valuations, leading to the index rallying by 7% on top of the 2% rise seen on Monday.

Those seeing swift paper profits have included interactive investor clients after they made the e-commerce giant Alibaba our most popular overseas stock in the past couple of sessions.

The company, which is China’s equivalent to US online retailing giant Amazon, rose by 9% in Asia trading, with entertainment and tech conglomerate Tencent up by a similar level.

Their gains provided a boost for Scottish Mortgage (LSE:SMT) investment trust, which has 4.2% of its fund invested in Tencent and 3.3% in Alibaba. Other beneficiaries included FTSE 250-listed Fidelity China Special Situations (LSE:FCSS) , which like Scottish Mortgage has backed Alibaba since before its IPO in 2014 and still has a big chunk of its assets in the e-commerce giant. Its shares rose 10p to 341p.

The Baillie Gifford-managed Scottish Mortgage trust rose as much as 36.5p to 1,389p in the FTSE 100 index and is back within sight of the record high of 1,418p seen in February, prior to an outbreak of tech sector jitters later that month.

The shares are up 12.5% so far this year, with co-manager Tom Slater noting recently that the trust's exposure to China continues to grow on the back of some “really big opportunities”. In particular, he mentioned Tencent's creation of a near $200 billion investment portfolio in addition to operating its core consumer business.

Slater also backed digital payments firm Ant to work with regulators to overcome the issues that prevented the company's blockbuster float in Shanghai and Hong Kong last autumn.

Ant, which was spun out of e-commerce giant Alibaba in 2011, is one of Scottish Mortgage's biggest unlisted holdings. Slater said in June: “We think they are really focused on understanding what the agenda is of the authorities in China and moving the business to be compliant with that, so we think that they will work through those issues over time.”

Fund manager Hugh Young of Aberdeen Standard Investments told Bloomberg last week he has been buying the recent dip in Tencent shares and has also left most of his big tech holdings in China untouched.

He noted that regulatory crackdowns were common in other economies when things boom and that China was just trying to make everything fairer for its citizens. “Does that put us off investing in China? No,” he said in the interview.

The China rebound was accompanied last night by a boost for shares in Tesla (NASDAQ:TSLA) and other tech stocks as full regulatory approval for the Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX)'s Covid-19 vaccine offset Wall Street worries over when the US Federal Reserve will begin tapering economic support.

Tesla shares rose 4% and Amazon (NASDAQ:AMZN) lifted 2% in a further boost for Scottish Mortgage. Tesla has been part of the portfolio since 2013 and produced spectacular returns for investors following a massive jump in the value of electric car maker over the past 18 months.

The investment trust still has 2.6% of its fund in Amazon but has been reducing its exposure to the big Western online platform companies on concerns about how they will deploy their huge cash flows when under much greater scrutiny from regulators.

Slater said in June: “We think those issues are less acute for Amazon, which has still some really big opportunities in areas like grocery or in geographic new markets like India to deploy some of that cash.”

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