Investors should diversify into Hang Seng Tech index: BlackRock

Singapore

US technology stocks have been over-bought and investors should consider diversifying into the new Hang Seng Tech index for exposure to the 30 biggest tech names in China listed offshore, says Thomas Taw, head of Asia Pacific iShares Investment Strategy at BlackRock.

Last month, BlackRock launched its new iShares Hang Seng Tech exchange-traded fund (ETF), which tracks closely the performance of the Hang Seng Tech index, which includes Chinese tech giants like Alibaba and Tencent.

In an interview with The Business Times, Mr Taw shared that investing in thematic ETFs has gained popularity, with tech and healthcare enjoying the lion's share of fund inflows.

"Areas like ageing population, emerging market consumer growth, and healthcare innovation should all benefit from long-term demographic tailwinds," he said, looking at growth opportunities moving into 2021.

He added that investors globally would look to increase exposure to China technology names as the next major growth drivers of the Chinese economy.

He has previously highlighted concerns over capital concentration risk in FAANG, the acronym for American stocks Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google), their high valuations and the decoupling of the US and China economies which has seen tech become a key battleground.

On the China tech fever, Mr Taw said: "I still think global investors are underweight on Chinese equities, so the recent returns have been driven by domestic enthusiasm. The Hang Seng Tech index is a great way to get exposure to the 30 biggest tech names in China, listed offshore."

He noted that the huge returns in asset prices since the end of March was primarily driven by massive fiscal and monetary stimulus globally.

"If the economy really does show signs of a V-shaped recovery, we may actually see equities pull back as investors start to factor in less balance sheet-easing by global central banks. A good news is bad news situation for equities is certainly counter-intuitive but we have to bear in mind that bad news is good news/buy on dip strategy has worked for the best part of 10 years following the Great Financial Crisis," he said.

Mr Taw noted that he was not a huge proponent of market timing, "but I believe the best strategy at the moment is to reach for risk and growth as a core strategic holding (in places like quality, emerging market Asia, and Hang Seng Tech), take some tactical risk through rotating into value either through the value factor or buy Europe as a region, and diversify with inflation hedging through Treasury Inflation-Protected Securities (TIPS) and gold".

Since the Covid-19 outbreak and the subsequent huge fiscal and monetary support, ETF demand in Asia has mirrored global trends.

"In equities, there has been a strong preference for the quality, factor, technology and healthcare for sector exposures," Mr Taw said.

These are the areas where the underlying constituents generally have stronger balance sheets and better free cash flow yield, and they can ride out an economic storm or shutdown without going bankrupt.

There has also been more of a rotation into value as investors realise that recent macro data is pointing to the economy moving into the repair phase of the business cycle.

In fixed income, demand has been all about investment grade and high yield.

"With developed market bonds essentially at zero or negative, for the first time ever investors are not getting income from traditional 'risk-free' assets. Further to this, the Fed moved to support the investment grade and high yield segments of the credit market for the first time, which pulled in investor demand," he added.

Asked which countries he is seeing value, Mr Taw replied: "If we are looking strictly at value, India, Japan and Europe could benefit from a catch-up trade as disparity of value and growth narrows."

In the first half of this year, iShares ETFs traded US$5.1 trillion, which is the highest trading volume of any first half of the year on record.

Mr Taw said iShares' ETFs have functioned efficiently during extreme market volatility and provided a better way for investors to access markets through the turbulence. When volatility surges, investors increasingly use ETFs to allocate capital and transfer risk.

Like any investment, buyers should do their due diligence before purchasing an ETF.