Naspers Faces Challenges After Tencent is Blacklisted by US

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JIMMY MOYAHA: If we thought this year would start off uneventfully, the reality is shaping up to be quite the opposite – it’s going to be an intriguing time. Just yesterday, the US issued a statement regarding the blacklisting of Tencent, which sent shockwaves through Asian markets and significantly impacted South African markets as well. The effects are still being felt today.

I’m on the line with Henry Biddlecombe, the head of asset management at AG Capital, to analyze this situation and decipher what’s unfolding. Good evening, Henry. I appreciate you being here. The US statement is quite alarming. Is there justification for it? Does it hold weight, and what exactly was conveyed?

HENRY BIDDLECOMBE: Hi, Jimmy. This is certainly significant for South Africans, particularly because Naspers is the largest stock on our market. It carries more weight for us than for many others worldwide.

To address your question about its justification: in my view, this is somewhat procedural.

Essentially, the US Department of Defense has placed Tencent on a watchlist along with other Chinese firms that may have connections to their military – the People’s Liberation Army.

And understandably, that’s something that a nation like America would want to monitor officially.

JIMMY MOYAHA: It seems, as you said, that this isn’t particularly surprising from the US standpoint. Are there companies from China that haven’t yet made it onto the watchlist?

HENRY BIDDLECOMBE: Yes, the list isn’t very extensive. It doesn’t imply that these companies are an immediate threat to national security.

We really need to understand how China operates. It functions very differently from the typical Western countries you and I might be more familiar with.

The boundaries between military and civilian sectors in China are quite blurred. The Chinese Communist Party, by law, mandates that all companies must assist the People’s Liberation Army.

Thus, any data or resources held by a Chinese company must be made available to the Chinese military.

You can imagine that a company like Tencent holds vast amounts of data, a significant user base, and immense technological capabilities which could be advantageous for military use in certain scenarios.

JIMMY MOYAHA: This echoes much of the discourse we witnessed last year surrounding ByteDance and its subsidiary TikTok, particularly regarding data privacy concerns.

Could this signal the beginning of a new phase in a trade war?

I’m recalling the tensions experienced during and after the pandemic surrounding US-China trade relations – all the implications that entailed. Is this merely a new dimension of that conflict, or an escalation of the existing one, this time fought digitally?

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

This reflects the rising geopolitical tensions between the two nations, particularly with a Trump administration potentially gearing up shortly.

I anticipate we’ll witness more of this, rather than less.

Furthermore, the Chinese tech landscape has faced immense pressure for several years. It began as a heavy regulatory crackdown within China, and now, it appears they are grappling with increasing tensions between the two nations.

While the Nasdaq and the US tech market have surged nearly 100% over the past five years, that of China remains stagnant.

Now, one must ponder: with such adverse news, are the stocks appealing due to their low prices? Should I sell US tech and opt for Chinese tech?

That’s a question worth considering.

JIMMY MOYAHA: I’m intrigued to get your perspective on that, Henry. As an asset manager with AG Capital, which oversees global markets, do you believe the pressure applied on China at this moment is excessive or unreasonable? Or is it simply the byproduct of the US continuing to dictate the narrative?

HENRY BIDDLECOMBE: Your questions today are spot on.

Considering the past five years, I would argue that China ought to and likely will trade at a significant discount relative to the US long-term. The discussion lies in determining just how substantial that discount should be.

Do I view Chinese tech as a relative opportunity right now? Absolutely.

This leads me to suggest a strategy of shorting US tech and going long on Chinese tech as a tactical approach for now.

JIMMY MOYAHA: Regarding US technology, the surge we saw in companies like Nvidia, how do we anticipate these geopolitical tensions will influence global tech sectors? Much of China’s pushback has been concerning restrictions on certain key materials needed by companies like Nvidia for their products.

I worry South Africa might get caught in the crossfire if we aren’t careful already. How do we navigate the tech investment landscape?

HENRY BIDDLECOMBE: This sector is critically important on a global scale, yet it’s also highly concentrated.

Only a few companies can produce the silicon and chips required for cutting-edge AI technology.

As for practical responses, I confess it’s tricky. The two countries may work over the next decade to establish somewhat independent supply chains. However, presently, the connection is too intertwined to see how feasible that is.

JIMMY MOYAHA: It appears we’re dealing with quite a complex situation.

Before we conclude, Henry, how can we, as South Africans, mitigate the fallout from these developments? It seems like we’re in for a volatile year ahead.

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

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

However, regarding the specific tensions between the US and China, I would suggest this may generally have a net negative result for us.

That said, I feel there’s increased risk in equity markets right now compared to the last five years, so it’s prudent to be cautious and avoid significant risks.

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

JIMMY MOYAHA: It looks like we’re in for quite a tumultuous journey, with many hurdles to navigate. Thank you so much, Henry, for your insights and for joining us. That was Henry Biddlecombe, head of asset management at AG Capital, here with us to discuss the US Defense Department’s decision to add Tencent to their watchlist and its repercussions on our markets and beyond.

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