Should You Invest in Chinese Tech?

Thank goodness we’re in a low interest rate environment. For those of you holding cash, it means you’re not losing your shirt.

If interest rates were higher, asset prices would be running away — a terrible situation for Aussies holding cash in the bank.

Yet even with interest rates at record lows, it doesn’t mean there aren’t investments to make.

Sure, asset prices are generally high. It’s slim pickings out there in the market. But surely you still want your money to work for you and not the other way around?

So, what’s the best investment you can make today?

I’d argue Chinese tech companies offer a great opportunity.

There’s a sense of certainty. They have long growth runways and you can even find reasonable prices among them.

Don’t believe me?

The biggest rewards stem from the biggest risks

Risk is not volatility. It’s not a stock price that moves around a lot.

Risk is the chance of losing money permanently. It’s when you rush into an investment without knowing the particulars.

Imagine a coin flip. There’s a 50% chance of winning. Would you bet $10,000 on a single flip to make a 50% return?

Of course not!

Such a bet is risking everything to win half of your original investment. For you to take the bet, the potential return has to be more than 100%. Otherwise you’re betting with the odds against you.

The point here is not the potential return you’re looking for. The point is that you wouldn’t take the bet because you fully understand what’s going to happen.

Imagine the same scenario but returns are highly uncertain. Maybe a potential return is within range. You might be able to make 1,000%, or you could make just 5%. And then there’s a 50% chance of losing it all.

This lack of certainty is why a lot of investors pass on companies like Amazon.

It’s why asking, ‘Why didn’t you buy Amazon?’ is a stupid question.

Did anyone really know Amazon was going to be the Everything Store back in 1997?

I’ll bet good money the answer is no.

Today, however, investors are more than happy to buy Amazon. The company has a solid footing in their domain. And they continue to spread across multiple industries, increasing their potential long-term return.

Investors are no longer asking where Amazon will be in the future. Most ask ‘Who can possibly topple Amazon now?’

Try not to sulk.

You still have a chance to buy companies like Amazon. They just have different names and operate in far larger markets.

China vs US tech investments

In fact, Asia has their own versions of Amazon, Google, Facebook and Netflix.

Take a look at China versus the US when it comes to search, video and social media.

MoneyMorning 18-07-18

Source: Abacus News
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These derivatives in Asia are just as strong as their Western counterparts. Some, you could argue, are even stronger.

Take Alibaba Group Holdings Ltd [NYSE:BABA] and JD.com, Inc. [NASDAQ:JD].

Both have fingers in multiple pies. But the majority of their earnings come from e-commerce. Like Coles and Woolies, you could argue this Chinese duopoly isn’t going away either.

And let’s not forget the smaller firms. Companies in Singapore, India and Malaysia are rolling out proven business models.

While returns are by no means guaranteed, knowing a small firm in Southeast Asia is using REA Group Ltd [ASX:REA] takes a lot of guess work out of the equation.

Find investments in emerging markets

OK, but what about prices?

If these companies operate in such high-growth markets and work with proven models, why aren’t investors falling over themselves to buy them?

Short answer: they are.

Alibaba, Tencent, JD.com, Baidu. These companies don’t come cheap.

However, every so often you can stumble across a company like Yirendai Ltd [NYSE:YRD]. They’re a peer-to-peer lending company that has exploded in the recent months.

Take a look at revenue and earnings growth:

MoneyMorning 18-07-18

Source: Morningstar
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Even with such growth and a huge market to expand into, Yirendai trades for 6.5-times earnings.

The stock’s problem? Everyone hates it. A popular headline when searching for the stock is ‘Why I will never buy Yirendai’.

Most investors are worried that the company takes on far too many bad loans. Maybe everyone’s right. But if they’re not, the payoff could be MASSIVE.

My aim is not for you to go out and buy Yirendai, but to start looking for more Yirendais in an emerging market across the water.

Your friend,

Harje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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