After the explosive growth of DeepSeek, the entire Chinese equity needs to be reassessed.
In the latest report on February 5, Deutsche Bank believes that China's manufacturing and service industries occupy a leading position globally, and the launch of DeepSeek resembles China's "Sputnik" moment. 2025 is the year the investing world realizes China is out-competing the rest of the world, and the "valuation discount" of Chinese stocks will disappear. Deutsche Bank thinks the HK/CH equities bull market began in 2024 and will exceed prior highs in the medium term.
China's, Not AI's, Sputnik Moment
Deutsche Bank noted that China first rose to global corporate dominance in clothing, textiles, toys, telecom equipment, nuclear power, defense, and high-speed rail. Its technological achievements have been discounted by investors. By late 2024, China received attention for its rapid ascension to lead the world in auto exports, with it flooding the world with high-functioning, attractive EVs at prices far below equivalent existing models. This gained the world's attention. And in 2025, China in one week launched the world's first sixth generation fighter plane and its low-cost AI system, DeepSeek.
Analyst Marc Andreessen referred to DeepSeek's launch as "AI's Sputnik moment", but it is more China's Sputnik moment, where China IP gets recognised. The list of high value-add areas China excels in, and dominates the supply chain in, is expanding at a pace without precedence.
China-US Trade Issues May Shock to Upside
Deutsche Bank optimistically pointed out that the China-U.S. trade issues may bring positive surprises, and trade and markets are not so closely related.
The consensus on US-China tariffs lies somewhere north of DB's house view of 20% tariffs being imposed during 2025 in two steps (one of which has been announced already). The reality may end up being far more favorable than such bearish beliefs. The Trump administration is obviously keen on tariffs as a funding source and sees China as the primary source of such revenue for economic and strategic reasons. However, President Trump appears to value tactical wins, perhaps more than clinging to ideological positions that are struggling for traction. The traders had been in the ascendancy in recent years. Perhaps President Trump is more a political trader than investor (in ideology). If so, expect him to run a fairly tight stop-loss limit.
DeepSeek has unsettled the world belief that they could contain China. Better to focus on stimulating business, through lower regulation, cheap energy, and relatively low barriers to import of intermediate products that cannot be produced competitively domestically. That last part may take longer to get to, but Deutsche Bank would expect there will be internal demands to get to a more classic Republican position on trade, from House and Senate members and business leaders. That may take some back-and-forthing, but this analyst expects a more pro-trade position to ultimately become part of the developing America First agenda before the mid-terms.
Deutsche Bank thinks a political trader would look to lock in positions early, and so get a China trade deal in the first half of 2025 - and move on to focusing on Western Hemisphere issues. A quick deal may involve limited tariffs (as DB expects), back-tracking on some current restrictions, along with some mega-contracts between US and Chinese corporations. If this occurs, (and this analyst does), expect a rally in China stocks.
A decline in exports may actually drive the stock market up for a period. China's dominance in various industries has been achieved through excessive investment in many areas. If supply can be restricted, it may benefit stocks and release some capital for domestic consumption.
Pricing the Market Leaders
Overall, Deutsche Bank believes that as Chinese companies continue to solidify their dominance globally, investors may need to quickly adjust their strategies and increase their allocation to the Chinese market. The Hong Kong/China stock market is expected to continue leading global markets in the medium term, maintaining strong performance just as 2024.
The problem of investing in technology is that profits are concentrated in the market leader, and so an intense battle to achieve that position can occur. Investors in China are fully aware of this issue, but the same was true for leading tech stocks, like Amazon, at one point. If investors compare the CSI300 to NASDAQ, both of which are full of global leaders in their field, investors see that the US is generating double the ROE, but investors are paying four times the book value (8.2x vs. 2.0x). Most of the Chinese large caps are also listed in HK, where they can typically be bought around 40% cheaper, so near 1X. If investors look at the MSCI China Index, it is trading at a record discount to the world index of 10 P/E points, while also being very near the low end of its valuation range.
As China's corporates are eating the world, it seems that this valuation discount should at some point return to being a premium. Investors Deutsche Bank believes will have to pivot sharply to China in the medium term, and will struggle to get access to its stocks without bidding them up. Deutsche Bank was bullish but was troubled by the difficulty in finding what would make the world wake up and buy, and Deutsche Bank believes China's Sputnik moment (or moments with EV dominance as well) is it. Deutsche Bank expects HK/CH to continue to be leading markets in the medium term, just as they were in 2024.
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