Kevin Barlow, Miracle Mile Advisors Managing Director, explains how China's new data privacy law will affect the global economy.
JARED BLIKRE: Well, on to our first story. China is passing a new personal data law set to take effect in November 1, I believe. And just looking at a few details from the reports-- let me read this here. China has instructed its tech giants to ensure better secure storage of user data amid public complaints about mismanagement and misuse, which have resulted in user privacy violations. This is a Reuters report here. Akiko, we've been talking about this-- well, the China crackdown on tech. And this is maybe a little bit different. But it still is addressing complaints about those big tech giants. What's your take on this?
AKIKO FUJITA: Yeah, so officially, it's known as a Personal Information Protection Law. And the full text of this has not been released yet. But as we understand it through these reports, it is very similar to the data protection laws that are in place in Europe, as known as GDPR, which essentially requires organizations, as well as individuals, who collect data to ask for basically an OK from the users before using the data and processing that.
Now, there's one key carveout here, Jared, because you can say all you want in terms of GDPR setting the precedent in China following. China has a significant carveout here for the government. Because if you think about the amount of data that's collected in China, we've talked a lot about the surveillance state. If you've been to China, you know the amount of cameras, the amount of data that's collected. And so, many ways, it feels like this is just the government's way of really cracking down on data collection, but saying, look, we reserve the right to be able to look at that data for the government. That's a key difference.
Regardless of how you process it, though, it does point to a significant turnaround in terms of the attitude the government has taken on these tech companies, these big companies who've been collecting incredible amounts of data, which has led to the success of those like an Alibaba, like a Baidu.
And a lot of people have pointed to what we heard from Baidu CEO Robin Li back in 2018, who really said that in China, we just take a different approach towards data, that users trade privacy and allow for data collection for convenience and security. The law we're looking at now out of China seems to suggest that there is a significant shift on that front.
JARED BLIKRE: Yeah, and we want to continue this discussion. For that, we're going to bring in Kevin Barlow, Miracle Mile Advisors Managing Director. And just thinking about this China situation, I guess, you could go back to last fall 2020. Ant Financial IPO put on hold, effectively canceled by the Chinese government. It looked like Jack Ma might have been in a little trouble there. But things have escalated recently. What's the end game? How do you see this evolving?
KEVIN BARLOW: Yeah, when you look at Chinese technology stocks, they're down over 60% on the index over the past six months since February. And you're going to see a spillover effect not only just into other Chinese equities, but into the overall equity market as a whole. If China is signaling that they are no longer interested in foreign direct investment, that is a major global geopolitical shift and has implications across the entire global economy.
AKIKO FUJITA: So, Kevin, is there still a case to invest in Chinese equities? I mean, if you look at-- a lot of people have looked at KraneShares, their ETF and KWEB, to see how significantly these stocks have been hit. It used to be that the concerns were around regulation here in the US. Now we're looking at regulation over in China as well. You've got these companies that are squeezed in the middle. What is the case for investing in them?
KEVIN BARLOW: Yeah, and we began discussing that earlier this year when Jack Ma went missing for a couple of weeks. When one of your top business people and billionaires goes missing, that's an indication that things are changing. So the argument in terms of investing there is simply valuation, that you've seen a 60% drop from the highs in February and that Chinese technology companies traded at very attractive valuations relative to their US counterparts because of that drop.
However, you have to take into account that there's significantly more risk from a regulatory perspective. Five years ago, everyone was worried about cracking down on Google and Amazon. And the Chinese companies were immune to that. But I think now you'll see that Chinese companies actually have more regulatory risk than US tech companies.
JARED BLIKRE: You know, I get a lot of calls from people that look at beaten down stocks, and they say, when do I buy? Where is the bottom here? And should investors be dipping their toes in, in the present time? Is there some kind of signal that you would wait for in the future? Or is there simply no case for owning these shares as a Westerner?
KEVIN BARLOW: Well, I think that's very hard to determine because that's something you can't look at a spreadsheet or look at an earnings report and determine. It really is a exogenous risk in terms of the leadership's regulatory decisions. And I think for years, people thought that there was no situation where China would reject foreign direct investment or the ability to list on foreign exchanges. And you're now seeing that's a major risk factor.
So I think that there is a case for investing, but it's buyer beware that the Chinese leadership can make a change on a dime and that the companies there have to follow that. And that's not something-- a similar risk that you'd have when you're investing in US tech companies.
AKIKO FUJITA: Kevin, let's pull out a bit here and look at the markets broadly, you know, what you're looking right now in the face of concerns around the virus, the questions around timing of tapering with the Fed. What are some specific sectors where you see real opportunity, whether that's in the US or outside?
KEVIN BARLOW: Yeah, Bridgewater just came out with some really interesting research about, there's about 40% of companies that are highly sensitive to what's going on in the economy and about 40% of companies that are highly sensitive to liquidity. And right now, we would be focused on companies that benefit from economic growth, rather than those that need excess liquidity.
As you begin to see the Federal Reserve begin to taper, look at higher interest rates in the future company, but have economic growth of over 6%. Old line companies look very attractive. And by old line companies, we like sectors like industrials. We like sectors like finance. We like sectors like tech 1.0. So not the new IPOs and the startups, but the companies that were launched in the 1990s that really now have strong balance sheets that are-- and are high quality companies.
JARED BLIKRE: So if you go into-- you're describing a factor or style here, which is a strong balance sheet. Where do you see the growth trade that has done-- that had done so well last year, picked up and has just kind of fizzled out over the last five or six months here?
KEVIN BARLOW: So growth stocks have done fantastic, but, really, they are-- they require a lot of liquidity. So as the Federal Reserve begins to pull away the liquidity punch bowl, those are stocks that are going to have a much tougher time. And right now, the top five companies really have become more quality companies. But the smaller cap tech companies are all priced to become the next Amazon. And while some of them will be, not all of them will. So we see a lot more risk in small cap and growth in areas like that and see more opportunity on a risk adjusted basis in areas like industrials, financials, as opposed to the growth trade.
JARED BLIKRE: Yeah, and we're definitely going to be keeping a keen eye on that going forward. Kevin Barlow of Miracle Mile Advisors Managing Director, thank you for joining us here.