As tall poppies get brought down to earth in China, we note this is not a new phenomenon. The selloff in Chinese Tech is part of a long run pattern that poses serious questions for the use of traditional stock selection and portfolio construction tools in China:
1) market cap indices
2) old-style risk management (that forces purchases of mega caps)
The tall poppy effect in China results in the largest companies having less staying power (below left), and, we believe, offers a far better opportunity in small and mid-cap names.
