The ongoing US-China trade war is not affecting stocks in a uniform manner. For instance, the trade tensions are having little impact on the stocks from China's internet sector. However, the Hong Kong/China small caps are suffering more severely, with the Hong Kong-listed small caps experiencing their fifth consecutive year of underperformance.

In general, the US-China trade war has impacted the Hong Kong/China small-cap sentiment more severely than large caps. "The US-China trade war produces a very negative investor sentiment when they look at small caps. And at the same time, small caps have had a more difficult time on the earnings growth during the past few years," says John Choi, head of Hong Kong and China Internet at Daiwa Capital Markets.

Hong Kong-listed small caps have remained out of favour with investors this year. "It has been five consecutive years of underperformance relative to the large caps names. And Asia ex-Japan, in general, is in its third consecutive year of underperformance," says Choi.

"We view this underperformance as an area of concern. It is possible the trade war could have more impact on the small cap," says Choi, who also notes that exporters have had bigger impacts and the stock prices of some of these companies have declined.

"The market has indiscriminately placed a lot of these small-cap names in the same basket, which we disagree with," Choi notes, adding that Techtronic Industries, a Hong Kong-based electronic equipment manufacturer, is one of the names they favour over the longer term.

"All the sectors under the internet have experienced a tough year in 2018. But the trade war does not really have any meaningful impact on this sector," says Choi. The short-term impact we are seeing is not from the trade war. It is actually from the macro impact," he adds.

The E-commerce sector has the best visibility, given the macro situation and regulatory environment, according to Choi. "In terms of the growth, this sector is still very healthy," he says. Online gaming is also a sector that Daiwa favours. "We have also seen some of the cleanups and restructuring in some of the sectors including online advertising," Choi adds, noting that these changes might lead to better prospects.

The China internet sector's fundamentals remain solid. "If you look at the online penetration rate, China is still very high compared to other countries," says Choi.

Tencent, the top stock in Hong Kong in terms of turnover, has seen significant declines in its stock price recently. "Sentiment is definitely weighed down by Tencent, but I think the fundamentals are far more important," says Choi.

"Sentiment could have further negative impacts, which is something beyond our control. But on the fundamentals and earnings revision, we believe that we are getting pretty much closer than a few months ago in terms of market bottoms. For the earnings growth expectations for the second half of this year and 2019, we start to see the market revise down their expectations," says Choi, noting that there might be some turning points happening soon.

In terms of threats, the trade war might have a negative impact on the development of AI, Choi notes. China has relied on imported chips and Chinese internet players have been investing heavily in AI technology. The trade war, which includes the ban on the purchase of US technology, might impact the AI industry.