In recent weeks, the emergence of DeepSeek, a Chinese artificial intelligence startup, has ignited a renewed interest in the Chinese stock market, particularly among global investors. Analysts are beginning to view Chinese equities with a more optimistic lens, even amid ongoing economic uncertainties. As Liqian Ren from WisdomTree highlights, the narrative surrounding China used to be one of avoidance – a country deemed “uninvestible.” However, the current landscape suggests that investors are reconsidering this stance, realizing that innovation can thrive even in a challenging macroeconomic environment.
This incremental shift in sentiment underscores a broader understanding that significant advancements, particularly in technology and pharmaceuticals, are attainable in China. Ren anticipates that the next few years will witness considerable growth in sectors such as drug development, driven by local companies like DeepSeek—an early indicator of possibly more breakthroughs to come.
DeepSeek’s introduction of a competitive open-source AI model in January has raised eyebrows worldwide. Its capability to significantly lower costs while maintaining quality has taken U.S. tech investors by surprise, especially given the constraints imposed by U.S. export controls on high-end semiconductors. The repercussions of this advancement became evident on January 27, when the stock of Nvidia, a dominant player in the U.S. chip market, experienced its most substantial drop since 2020, reflecting the broader sector’s turbulence.
David Chao of Invesco has expressed doubt regarding the massive sums invested in AI technology, questioning the long-term returns on these investments amid a rapidly evolving competitive landscape. As the disparities between U.S. and Chinese technology companies close, the idea of diversifying investments into Chinese equities becomes more attractive, particularly as these are currently undervalued in comparison to U.S. counterparts.
Chao advocates for a balanced investment strategy favoring U.S. small-to-mid-cap stocks alongside Chinese tech firms. The potential of these Chinese companies, especially given their attractive valuations and recovery trajectories, signifies a possible pivot in investment strategies.
While DeepSeek continues to draw attention, analysts are focusing on specific Chinese stocks that stand to gain from the burgeoning AI landscape. Bernstein analysts have highlighted Kingdee and Kingsoft Office as their top picks, presenting unique investment cases. Kingdee, especially, shows promise with its established client base among small and medium enterprises, coupled with its subscription-based business model.
With expectations of economic recovery and a potential resurgence in corporate spending, Kingdee appears well-positioned to capitalize on the rising demand for AI solutions, which analysts argue is not yet fully reflected in current stock valuations. In contrast, while Kingsoft Office has received attention for its applications, analysts express caution due to market uncertainties surrounding its enterprise AI initiatives.
J.P. Morgan’s equity strategists also favor Kingdee but remain slightly more skeptical about the immediate prospects for Kingsoft Office. They highlight the importance of the software landscape within China and how recent developments in AI infrastructures, particularly the low-cost offerings from DeepSeek, could create a broader market for AI-enabled software applications.
Among publicly traded companies, Xiaomi emerges as a standout player aligned with the AI wave. Analysts have raised revenue forecasts for Xiaomi, underscoring its innovative in-house AI team and strategic partnerships with firms like Kingsoft Cloud. The growing role of AI in everyday devices positions Xiaomi favorably as one of the top global edge AI players, poised to leverage market opportunities stemming from the shift toward smart, connected living.
Despite these encouraging trends, some challenges remain on the horizon for Chinese stocks. Tariffs imposed by the U.S. government continue to cast a shadow of uncertainty, contributing to volatility in the financial landscape of the world’s second-largest economy. Nevertheless, there are signs that investor interest is shifting towards Chinese markets, particularly following recent stimulus measures announced in September.
What sets the current situation apart is the focus on private sector innovation, as demonstrated by DeepSeek’s breakthrough. As highlighted by WisdomTree’s Ren, a notable trend is emerging wherein private enterprises are showcasing significant advancements in technology. This has likely encouraged shifts in investment strategies, reflected in the performance metrics of different stock categories.
The WisdomTree China ex-State-Owned Enterprises Fund (CXSE) has shown positive performance compared to state-owned enterprises, with a noticeable uptick of nearly 4% for the year, against the backdrop of more traditional firms declining significantly. This shift signifies a growing recognition of the potential of private firms in driving China’s economic transformation and enhancing competitive advantages within the global market.
The rise of DeepSeek and the subsequent changes in sentiment toward Chinese equities signal a pivotal moment in investment dynamics. As analysts and investors navigate these developments, it becomes increasingly evident that the landscape of Chinese technology is evolving, presenting a mosaic of opportunities driven by innovation and changing market perceptions.