(July 27): As the artificial-intelligence rally sputters in emerging markets, investors searching for high-growth alternatives are turning to Chinese biotech.
Bloomberg’s EM technology index has tumbled into a bear market over the past month as SK Hynix Inc and Samsung Electronics Co, the poster children of the AI boom, slumped 40% and 29% respectively. By contrast, at least 10 Chinese pharmaceutical stocks have posted double-digit gains, making healthcare the best-performing sector in Bloomberg’s emerging-market benchmark.
The rotation reflects growing wariness over stretched AI valuations and the concentration of gains in a few technology stocks. Rather than retreating to traditional defensive sectors, investors are hunting for the next innovation-led growth story, according to Nelson Yu, the New York-based head of equities at AllianceBernstein. Chinese biotech fits the bill as the nation’s drugmakers expand globally through licensing deals with multinational giants.
“As investors become increasingly concerned about concentration in AI and AI-adjacent investments, healthcare is increasingly being viewed as an attractive way to gain exposure to innovation, secular growth and profitability while remaining largely uncorrelated to the AI trade,” said Yu.
Drug developer CSPC Innovation Pharmaceutical Co’s shares have soared 52% over the past month. The company is developing RNA-based treatments for kidney disease and recently announced a deal under which AstraZeneca plc agreed to pay as much as US$1.8 billion (RM7.35 billion) for global rights to the treatment.
The agreement is typical of how China is disrupting the global pharmaceutical industry. Traditionally, large firms discovered many drugs in-house before outsourcing clinical trials or manufacturing to lower-cost providers. Increasingly, local companies are developing novel drug candidates that global firms are paying to license. Revenue increasingly comes from the drug’s successful development, not merely the unit of work done.
Intellectual property is increasingly flowing from China to western drugmakers rather than the other way around, giving investors another reason to look beyond technology for growth.
This shift in how drug research gets done and China’s increasing role in it make the country’s pharmaceutical sector a long-term structural bet, said Wenchang Ma, a portfolio manager at Ninety One.
“China is transitioning from a generics manufacturer to a leader in innovation,” she said. “Pipelines of innovative products and out-licensing deals are growing rapidly, capturing more investor attention.”
While there has been a healthcare rally in US stocks as well, it has been driven largely by mega-cap companies such as Eli Lilly & Co and Johnson & Johnson. In emerging markets, however, the rally leaders are smaller innovative companies that aren’t widely known outside China.
On Monday, the EM health-care index rose 0.6%, with Imeik Technology Development and Biocytogen Pharmaceuticals jumping at least 4.3% each.
China’s move toward innovative medicines may also shield biotech firms from US President Donald Trump’s proposed tariffs, said Marcus Weyerer, an investment strategist at Franklin Templeton.
“Biotech is becoming another reason to invest in China,” he said. “If you think about where investors find innovation today, it’s in technology, it’s in AI, but it’s also in biotech.”