US Hammers China — Again: Chinese Software Companies and the CCP

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US China Cold War - Chinese Software Companies Accused of Feeding Data to CCP

Can you feel that dull thump? I know I can. 2020 just keeps giving us headaches. The good Lord knows we know about the virus and the lockdowns.

But the US administration is now really hammering on China. I don’t like where this is going.

What’s the story?

The Financial Times reports that ‘the Trump administration has vowed to “take action” in a matter of days against Chinese software companies that it perceives as a risk to security’.

Secretary of State Mike Pompeo says Chinese software companies are feeding data to the Chinese Communist Party and their national security apparatus.

I have no doubt they are. The US tech companies do the same thing to their national security apparatus as well.

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And you could certainly make the case that TikTok can be locked out of the US if Facebook and Google are shut out of China.

But clearly there are deeper issues and bigger dangers brewing between China and the US than a battle of data and access.

This isn’t going to end even if TikTok is sold to Microsoft or some other US company.

My friend and colleague Greg Canavan has been urgently warning on this split for some time and its implications for the Aussie market. I urge you to follow his analysis and commentary on this.

This issue is very problematic as we share investors and traders. Any business associated with China used to carry the complimentary growth premium. How long before exposure to China starts to look like a liability?

There can be no certainty you won’t be hit in the trade war, even if it’s just as collateral damage.

Or perhaps I’m overthinking things? After all, apparently we can now simply divide businesses on the ASX as ‘boomer stocks’ or ‘Robinhoodies’.

The Sydney Morning Herald reports on the arrival of the millennial day traders. Give it a read. It’s worth it. I was astonished to see that CommSec alone has added 400,000 accounts this year.

One of the young bucks says he doesn’t invest in ‘boomer’ stocks like established banks, miners or industrial names. Too boring! Instead he prefers penny stocks.

There’s no doubt you can get some ripping runs at this level of the market. But it’s also notable for another reason: there are few, if any, short sellers.

That means trading in any one stock, if it catches the eye of the herd, can become extremely one sided as momentum buyers all chase it up. Somebody gets left holding the bag eventually.

It also accentuates a trend that’s been prevalent for about five years now: the marked shift away from ‘value’ stocks to growth/tech.

The value investors keep saying their style will make a comeback. But they face a problem: it’s called the central banks.

These central planners do everything they can to prop up asset markets. How can value ever reveal itself if markets aren’t allowed to fall?

Instead, endless liquidity just keeps flowing to the high growth names. That’s how the FANG stocks can add over US$1 trillion in market cap this year while the rest of the US stocks slowly whither away.

What’s true of the US is not necessarily true of Australia. There’s a sense that the window of opportunity is narrowing in the blue chip stocks on the ASX.

We don’t have the equivalent tech sector generating high revenue growth. The Robinhoodies are right about one thing: the best opportunities are in small- and mid-cap stocks.

But you have to watch, as per above, you’re not jumping on a crowded trade already. Gold stocks feel a little that way right now.

At least gold producers make money. The buy now, pay later sector is the danger zone.

Where to look right now? The strongest and most durable trend I can find is the push to renewable energy and ‘green’ tech. Thank you, too, if you wrote in last week with some stock suggestions on this theme.

Tomorrow, we’ll go over some of the candidates!

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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