DEEPSEEK Ignites Chinese Tech Stocks – How to Adjust Your Portfolio to Stay Ahead of the Trend
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DEEPSEEK has reignited interest in Chinese stocks after two years of likely painful returns for investors. The launch of DEEPSEEK has fueled a sharp rally in Chinese tech and AI stocks in early 2025. Today, we’d like to share our outlook on where the Chinese stock market is headed from here.
- The Chinese stock market is staging a strong recovery, delivering positive returns in the first two months of 2025.
The Chinese stock market is rallying, contrary to the views of global analysts at the beginning of the year who predicted a prolonged slump for the Chinese market due to the return of Trump and his trade policies. The market has been boosted by the launch of DEEPSEEK’s AI, a Chinese company, which offers high performance at a low cost. This has forced AI developers worldwide to reconsider their development approach and question whether the DEEPSEEK model is “more cost-effective” than relying solely on processing power. Consequently, Chinese AI-related stocks such as Alibaba, Tencent, and Baidu have seen sharp gains across the board, in contrast to chip-making companies like NVIDIA, AVGO, AMD, and TSMC, which experienced steep declines in the early part of the year.
- DEEPSEEK has a good approach to AI development, but it still has manufacturing limitations.
DEEPSEEK is making a significant shift in AI development by focusing on algorithms rather than increasing processing power. However, research data reveals that DEEPSEEK’s V3 model was trained using over 2,048 NVIDIA H800 chips, not domestically produced Chinese chips. The Huawei Ascend 910C was only used in the final stage of refining the DEEPSEEK AI. This reflects that China still “lacks the chip technology” to support large-scale AI training.
Under the limitations of US export controls, China still cannot access EUV lithography machines from ASML. This forces them to use DUV technology, which has a higher cost and lower efficiency than competitors like TSMC. TSMC can produce 7-nanometer chips with a yield rate of over 90%, while China’s yield rate is only 50%.
Although China is narrowing the gap in AI performance with the US, the technological limitations of its semiconductor industry remain a key factor that could hinder long-term growth.
- The Chinese government is now supporting AI development.
In mid-February, Xi Jinping held a meeting with leaders of the Chinese tech market, including DEEPSEEK founder Liang Wenfeng as well as CEOs from leading tech companies such as Alibaba, BYD, Huawei, CATL, Xiaomi, Tencent, and Meituan. This is considered a significant signal from the Chinese authorities that they will support the “private sector” to play a greater role in driving China’s economy, after a series of measures over the past few years have disrupted these tech giants. China has stated it will relax various regulations that have been an obstacle to private sector investment. This clearly reflects China’s strategy to counter the United States, and it is certain that the technological competition between the two countries, especially in the AI arena, will intensify.
- Hedge Funds Begin to Re-enter the Chinese Market
From a Reuters report, global hedge funds have begun to re-enter the Chinese stock market this year, despite uncertainty about the trade relationship between the US and China. Data from Morgan Stanley indicates that hedge funds’ holdings in Chinese stocks have been consistently increasing but remain at a low level compared to the past.
American investors, who make up the largest group of hedge fund investors, still have a low allocation to China, accounting for only 3% of their portfolios compared to 60% in the US stock market. However, their investment trend in Chinese stocks is steadily increasing, especially in the growing technology and AI sectors.
- Short-term, Chinese tech stocks still have supporting factors, but long-term, they require continued monitoring.
Generally, for short- to medium-term investments, ‘Sentiment’ and ‘Valuation’ are the main factors in an investor’s decision. However, in the long term, investors often prioritize ‘economic fundamentals’ and ‘international policies’ which affect investor confidence and directly influence the trend of foreign capital inflow.
Even though Chinese stocks have rallied strongly recently, the MSCI China Index is still trading at a forward P/E of just 11 times, while the CSI300 is at 13 times. This is significantly lower than the average forward P/E of 19 times for global stocks, indicating that the Chinese market is still relatively inexpensive.
However, foreign investors may not return to invest in Chinese stocks consistently “in the long term” until there is greater certainty in international economic policies, especially from the US. The US is currently showing a tendency to increase trade barriers and technology pressure. If there are tit-for-tat policy responses regarding AI, it could impact the growth of China’s domestic technology industry.
Therefore, in the short term, capital is likely to continue flowing into the Chinese stock market. The inexpensive valuation and positive sentiment should support a further rise in Chinese stocks, especially in the tech sector. However, the long-term outlook requires continued monitoring, as AI is still a “long game” between the US and China.
In summary, we believe that adjusting your portfolio to invest in Chinese stocks in 2025 is an “interesting” option. We recommend adding this investment to your Satellite Portfolio to create an opportunity for short-term returns (3-6 months) at a proportion of 5-15%, based on your risk tolerance. However, we do not yet recommend adding it to the Core Portfolio for long-term investment due to the persistent long-term risks from international policies.
If you are looking for investment opportunities that align with the growth trend of Chinese technology and AI stocks, BLUEBELL Securities Co., Ltd. is ready to provide guidance on adjusting your investment portfolio to suit the current situation. We focus on strategies that enhance investment efficiency to increase the potential for good returns in both the short and long term.
