Chinese equities are on a tear, and it's led by technology breakthroughs like Deep six AI model and BYD's super fast charging EV battery are reminders of China's innovation. Today we're sitting here and of March, the Hangsang China Enterprises Index that tracks mainland equity is listed in Hong Kong, is up almost twenty percent this year, ranking it among the best performing around the world.
But we've had false stans before. Some investors are questioning whether things have really changed. China's property market remains weak. Officials are still struggling with deflation. The pivot to consumption to lead growth has yet to bear fruit, and now we have the onset of US tariffs. You're listening to Age Eccentric from Bloomberg Intelligence. I'm John Lee in Hong Kong.
And I'm Katydmitriva, also in Hong Kong.
Today's guest is Winnie Wu. He is the chief China equity strategist and co head of China Equity research for Bank of America Securities. We need welcome to the show.
Thank you very much for having me so, Winnie, I guess the first question is given the topic, what actually is the leading Chinese stocks right now. Why have we seen this rally?
I think the rally to some extent is a continuation of last year. Right September October we saw a big round of China rally and that was mainly driven by the policy pivoting policy stimulus, that people are getting more optimistic about China monitary, physical easing, that they're going to do more and prioritize growth over other things. But more importantly, this year's rally are driven by two additional factors. One is the technological breakthrough right Deep Seek clearly was a
big while to the global investors. That changed a lot of the consensus understanding of the future of AI, the global competitive landscape of AI, and also the perception of whether China's private sector is still competitive and innovative right, whether the animal spirit it still exists in China. So I think, you know, this technology breakthrough is a very big factor. But the other thing is also the understanding
geopolitics and the so called policy certainty, policy visibility. You know, for the past there's a lot of criticism on China lack of policy visibility, the lack of policy direction clarity.
But I think this year actually people feel China's policy visibility is better that we know if say, you know, consumption deflation, if the export grows, weakens, right, if economy struggles, Chinese regulator are going to do more, and they've vowed several times, you know, from September October last year to January to the reason m PC they said they're going to launch more policy to support economies.
So people actually are getting a bit.
More confident about the policy put for China, whereas on the US side, whether there's tariffs, no tarriffs, ten percent, twenty percent, arriffs on what and who is actually quite confusing. And also other non tariff barriers, including some of the Chip band's export controls, are also leading to a lot of confusion.
Sort of a flip.
It's a flip from what we've seen in recent or past years with US and China than.
Totally so to that extent, the policy discount on China has largely reduced and the equity risk of premium on China because of you know, China has no innovation, has no future, have no growth in the AI era, that's also completely reversed.
So we have to ask, is this time really different for Chinese equities because we've had quite a few false starts before.
Yeah, and we've had false even with the government with a certainty. I mean these policies, are they really that certain?
I mean, I think market always have ups and downs, right, And we always say that from equity market perspective, market leads fundamental in terms of the GDP cycle, in terms of the earning cycle, but it typically leads by a couple quotas.
It doesn't lead by twelve months.
So from our perspective, the way to evaluate whether this rally is sustainable it's always are we seeing the fundamental turnaround in the foreseeable future? This time around, I think the technological breakthrough is very significant in the sense that hopefully it stopped the so called downward spiral that market worried about in the past few years. That you know, every segment in the economy from local government to big corporate to general household or in the sort of deleveraging
the risking balance sheet recession type of mode. I think that deep Seak really helps signal reversal of the sentiment of the morale. After the breakthrough of deep Seak, we saw local government are getting more pro growth, right, you know there's a healthy competition between the higher tiers cities
like shang Gan. People are asking, hey, why the deep Sea Unitary robotics are both based in Haunjo, Why it's not changing, why it's not Beijing, why it's not showing high So the local government are shifting their focus to more on how do we promote future growth? After deep Sea, we see the leading internet companies which in the past few years we're very much focused on efficiency, games, buy bags, increasing playout to now doing capex investing for the future,
which is very encouraging and even at individual household level. Previously, the perception is all the smart young kids or rich entrepreneurs are or fleeing.
Away from China.
But the breakthrough of deep Sea and Unitary are very encouraging, inspiring in the sense that the founder teams are very much homegrown talents. Many of the funders never been to Western education. So suddenly the smartest kids in the Chinese university like Beta, like Picking university like Tin. They see a future, right they can do something really cool staying in China rather than you know, trying to flee the country or just working for the governmental soe s a right.
So I think you know, this time is different in the sense that the technological breakthrough hopefully signals a buttoning of the downward spiral and starts a more upward spiral going forward. That there's more animal sperit, there's more entrepreneurship, there's more appetite for investment. But having said that, technological breakthrough is a little bit random in timing, right why is it January?
Why are they not March?
But the short term impact of this breakthrough broader economy on corporate earnings, on the problems we discussed earlier, deflation, job employment, in our property market, the short term impacts too insignificant.
That's why when.
Equity market rallies too hard, when equity market run too much ahead of the fundamental, we could still see pullbacks, or sometimes significant pullbacks. So I'm not saying that you know market wouldn't go back. In fact, our report last week we're saying, hey, hcim as said, China rallied thirty percent in two months, so investors need to be mindful of the potential correction in the future. But having said that, our view is still that this is probably a structural
bull market that we are seeing. The correction dips in the structural rally in the next three five year horizon, and on.
The structural part of it, because obviously this has to continue if you're betting on Chinese stocks, then I guess the question that is, you know, is there enough government support behind it, because a lot of it will depend on both government support of the sector in general, but also consumption.
Yeah. Absolutely, on the government support side. It appears that government is kind of still evaluating the situation. Yes, we got ten percent tariffs in February and in March, and we might get more in April and April. Second, but
exactly how is the impact of these terriffs. I think this is evaluating because since twenty eighteen, Chinese companies have been diversifying away from the US market, right, many have been building up factories in Asian market, in Mexico in other parts, and they've been you know, exporting more to say Middle East, more to other Asian economies, more to you.
Know, global cuts. So how big.
Is this terriff impact on China's export and export related activities, in terms of manufacturing compacts, in terms of employment. It probably still takes a few months to be seen. Also, I guess you know, market is expecting this meeting between presidents and President Trump, and in the meeting there might be more discussion about how the two country can work together, right. I think both leaders have kind of indicated that it's in the best interest of the two countries to work
together rather than have a tense relationship. So the upcoming meeting between the two leaders will also be very important.
I think at this stage, you know, from Chinese policy maker perspective, it looks like first couple months of micro data are fine, right, and property market in fact, in the past five months since October last year, was showing good trends in terms of better transaction volume, some improvement in transaction prices, especially in higher tier cities, and even the recent lend auction lens sell were very strong in January February, So it doesn't feel like, you know, they're
in a rush to launch the policies. But as I mentioned, this is probably a policy put So if in the coming months, let's say, export jobs significantly or activity data consumption data jobs significantly, then regulator will probably do more.
Okay, So you're saying that on the consumption front right now, things are looking okay. And they have these this arsenal policies in the background that they could deploy if necessary. But what about the support for the sector. If the stocks are being driven by deep Seek and this tech moment, is their government support to back this interest? I mean, this is a government that's very happy to intervene in private sector. So is that support there to kind of keep this rally going.
I don't think we should beat on government support to keep the tech rally going. I don't think that's something Gum will do. So I would say generally speaking, China's industrial policy has been supporting this hard tech deep tech right from you know, semiconductor advanced manufacturing to AID. There is a general policy support and there are state fund to invest in these related areas. But Deep Seek in
itself was more of an accident. It's not something to plan for, it's not something government policies support it.
It's it's really the.
Innovation by a private sector company, which it was not so much under radar screen for aio semiconductor or these innovasians. Right, it was a quant trading company. So yeah, I mean, I think so far the best performing stocks, their success are also more because of the bottom up innovation, the competition, the market forces. I don't think the support is something that will drive the tech value Asia.
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and share. I want to draw analogies to the US led AI rally and China's AI rally. Now, when chat GPT came out, I think two or three years ago. A few months later, I remember Nvidia had a bumper earnings and then US analysts were raising earnings estimates quite aggressively. Now in China's equity driven rally, are we starting to see Chinese equity analysts raise estimates.
Yes, but marginal compared to the type of multiple expansion that's expected. Right when I look at our analyst earnings result on some of the biggest tech companies, reported result is typically earning's upgrade its single digit, but po upgrade will be high double digit, so a lot of its multiple expansion. So in my recent report, I showed the valuation gap between the Magnificent and seven the US big
tech versus the top ten Chinese tech companies. Beginning of the year or end of last year, the Magnificent sevens pe multiple were trading at something like one hundred twenty one hundred and thirty percent premium to the Chinese tech names. Within two three months now the value gap is narrowed to only thirty percent, So a lot of the China tech rally was more by multiple expansion, not so much
of earnings. But you know, to be fair, they were training at a very depressed valuation multiple to start with.
Right now and this rally. Do you think that most investors caught this rally because it was really quick. If you look at Ali Barber's share price, I think it went up sort of sixty eighty percent in the space.
And in two months.
In two months now, institutional investors, it's pretty much too quick to catch this rally. What's your sense?
Yeah, I mean, I guess you know, hatch fund investors probably respond much more quickly.
I think for long.
Only investor it is really hard, partly because, like you mentioned, the China rally happened very very rapidly, and it's a very narrow rally. It's basically a handful of tech stocks that's done really really well. I mean even ten cent end the performed during the tech rally, and even if you overweight China Tech, if you are not in those few names that done exceptionally well, you might still end
up perform. Also, I know some like Greater China Fund that would have Taiwanese stocks in the portfolio a right TSMC would be one of the big positions again this year, unless you are one hundred percent in China Tech, you would end up performed again because China alone was the best performing market. So I think a lot of investors, especially lonely investors, are having a sort of challenging time
in terms of trying to outperform the rally. But nonetheless, China market going up with increasing interest and hopefully more fund the inflow is still a good scene for the market.
Did you feel that energy You were just at a tech conference? Was it in Taiwan?
Yeah?
Yeah, you're at a Tech Conference in Taiwan. Can you kind of take us behind the scenes of that. What were people saying, what were they discussing.
Yeah, so this is our twenty eighth Asian Tech conference, and this year we again had nearly record high number of investors and corporate attending. So the interest level certainly still very very high. I think generally people are still very Polish, very confident on the future of AI. Right. The deep seek actually kind of democratized the technology so that there will be more application signarios, you know, more smaller companies are able to leverage AI and have AI demands.
So there is this general optimism on the future of AI, you know, Agente tic Ai, Agi whatever, super AI. But on the other side, I think from an equity market perspective.
They are all more mixed feeling.
About the stock performance in the sense that whether it's the US tech names or Taiwanese tech names, when you speak to the corporate the guidance remain very positive, very confident.
But when I look at their.
Share prices, share prices actually struggle to suffered suffered from multiple de rating, right, which is kind of the opposite to the Chinese tech stocks. So at this level what do we do right reduce the exposure to US tech Taiwanese tech to trade the rally of China tech or do we hold on to our position of the US taiwan tech. That's really a quite challenging question.
What's the answer.
I don't think there's a concise answer, but I would say so far based on the past few days sentiment, it tend to be let's hold on to our US and Taiwanese tack and do not trace the stocks that already went up eighty percent in two months. And I think the final part of the conference is there's this concern about or discussion debate about how countries, especially like US China should or can work together in the AI era right, because AI brings a lot of opportunities benefit
but it does bring risks and challenges as well. So you know, the two biggest players US and China in this changing world, if they can work together in terms of managing the risk, setting the standard, cooperate, it will
probably benefit the broad their human society. On the other side, the concern is if the two countries are more in a sort of competitive mood rather than working with each other, then it might not be the best usage of resources might not be the best for promoting innovation and might not be the best for managing risks. In fact, one of their experts said, managing the risk in AI is
almost managing like nuclear related risk. Country nation states are not your biggest enemy because countries are generally going to be responsible of how they use their weapons or resources or their powers. The real danger are those like rogue actors, right that.
They could really go on extreme.
And take advantage or manipulate the capability the powers. So the big countries should really work together to prevent the risk from these rogue actors rogue players, rather than fighting with each other on country level.
When you wanted to take a step back, sounds like you were structurally on China, and that's sort of like a medium term view. But you did come out with the report recently and you did suggest it could be a market correction.
You explain, yeah, so again, you know, market price is reflective earnings and multiple as our earlier conversation went through.
So far, we see some improvement in earnings in tech related names, but there's still broader level many other company sectors, their earnings still struggle, and we'll probably see more of that in the coming weeks of the earning season, and with the uncertainty of terriffs trade wards in the coming quarters, things my need to go worse and before the governor stepping with bigger stimulars to put the floor and before
the company further adjust their business model to handle. So coming quarters chances are China's nominal GDP growth will still struggle and the pressure many corporates earnings were still structural pressure.
Whereas equity market, inspired by the tech breakthrough inspired by the policy, certainty already pricing a lot of positive news and had a very sharp rally, to the extent that valuation multiple of MSI China Index is now trading at twelve times forward pe, which was the previous peak in October seventh, last year's level, which was the peak at post reopening high in January level January twenty twenty three level.
So we are a bit cootious that at this valuation multiple, which looks fair to us right, good news are being pricing. So the policy put the technological breakthrough the potentially structural upcycle in the next few years, whereas the near term challenges has largely been overlooked in the past couple of months and one good news are in the price, bad
news are not. Then what could potentially come next is markets start to pricing these negative news is especially the challenging and fundamental things in terms of the macro data, in terms of the earning data. And also we are facing this event of April second, right, this global reciprocal tariff. For what does it mean for China? We still need to evaluate. So that's why we would advise the investor for the short term to take a more courtious view
and having the evaluation to wait. Stock market probably need to take a pause, wait for the fundamental to catch up before the sheer prices can a new highs.
Again, I'm wondering how much the US in this case because you had mentioned this earlier, but this idea of the flip in sentiment between certainty in the US versus China, and I wonder given the reciprocal tariffs and just tariffs in general, and investors looking at the stock market trying
to figure out what's going on in the US. We've seen this erosion of American exceptionalism and the American exceptionalism trade and I wonder how much of that might be able to create a bit of a buffer and in fact help Chinese equities because we've seen that with European stocks too. It sounds like everyone is just leave. It's there's that sucking sound. Is money leaving the US.
And I think there was a survey by your firm that suggests record money is leaving the US.
Yes, yeah, I think that played out a year to date already to some extent. And that's why the European stocks, the China stocks are doing so well. Right the reverse of fund flow two years ago in twenty twenty two, twenty twenty three, it's about sell China by USAI, selled China by Japan, sell China by India. Now, you know, when people start to reduce their concentration on US that many other markets actually benefit, especially European and China market.
But having said that, you know, US remains to be a very very big part of global investors benchmark. Right so within MSAI world, US is still like sixty three sixty four.
Percent of the benchmark.
China, after the reason of our performance, is still only three to four percent of the benchmark. So from any global or US investor perspective, it's still essentially critical to get the US market right, and after the big sale of these US big tax stocks, I think the question is at this level, do we continue to sell US to long China or do we take away and see mode right way to see you know, will the fat cut rate in May? And does the federate cut helps
with the US stock market? Also together with the US dollar index, right the DXY we can't from one O night to one O five within the first two three months of the year. But it looks like dollar index is also kind of stable light thing, so that might slow down the fund outflow from US to other market. But finally, I think our US rategy review is also when you sell US equity, you don't necessarily need to go to international equities. You might go buy bond or
you might stay with US money market found. So I think the first big wave of money leaving US to buy international including China equities, probably played out with the narrow evaluation gap between US and China tax stocks. I suspect will see a period of pause and reevaluation and waiting for the clarity on the US policies. And also two tome extent on the US economy. Right, it is the US economy, consumer space remains sound and solid, or
is the US economy really heading to recessions? So investors need to evaluate those before they take the next big step of rotating away from the US equities.
You did mention Europe, and it's quite interesting because China's had a fantastic rally, but it feels like China's almost been overshadowed by events in Europe like the bundjiolds of skyrocketed. Everyone's buying German defense stocks, infrastructure. If you do get this switch out of US, do you think investors will prefer Europe or China?
I think, from my understanding, going to Europe will be an easier call for the US investor. One is partly because, again from a benchmark perspective, European market, if you add up you know, the Germany, the UK, you know, the French market at the market within the MSAI World Index is actually a bigger part of the index than China, which is only you know, three to four percent. So from an index risk perspective, it's important to get European
market right. But also secondly, for the European market there's less concern of like the tail risks, say Sunction risk. Earlier this month, I was speaking to a COO of a global long the investor, and he's interested in the China Deep six story. He's interested in the China Internet names, which he used to have big position in. But now for him, the concern is still like what if some of these internet stocks got added down to various lists? Right?
We saw Tencent add on to the Defense Department's list in January this year, and from the narrative in US, it's still that US capital should not be funding the indigenous development of China's technology a icon and computing. So you know, among the US investors, there's still this concern that some of the best technology companies in China might be added on to various lists which give them sort of some reputation risk, or if it adds on to one of the investment band then it's a huge risk
for them. So that's some of the concerns holding back US investor from buying or chasing the China tech rally.
I did want to ask you about humanoid or robotic stocks. What's going on there? It seems to be some of the hottest stocks of being in this sector. Can you tell us is what are these companies that make these humanoid robots.
Well, you know, I'm not supposed to recommend individual stocks. Our second analysis does put out the report. I think one is manufacturing has been China's strengths. Right, China has a very complete suite along the old supply chain of manufacturing. So when China is ready to produce these humanoid robots, China probably has the most complete upstream, downstream component equipment, everything together and in a very cost efficient way of producing them in volume at affordable costs. So there is
a natural advantage. And I think you know the reason breakthrough in deep Seek in Ai and some of China's robotic company like uned Trees Robots was doing a big dancing in the Spring Festival gala in China, which which was pretty impressive, so that made people also more excited about the theme. But having said that, from a pure stock market perspective, the feedback from investors is this theme has been.
Again in China market.
People tend to play a three five year theme in like three five weeks, so many of the stocks already went up multiple times before they even start to produce robots. So against stock market probably got overly excited on some of these names.
Great, well, it's been very wide range conversation.
It's been great. Thanks so much for taking so much for having me.
Thanks weing you've been listening to Asia Soundrek from Bloomberg Intelligence.
I'm Carte Btriva on Hong Kong and I'm John Lee, also in Hong Kong. You can find our episodes on Apple Podcasts, Spotify, or wherever you get your podcasts. His podcast was also produced and edited by Clara Chen.
Thanks for listening, See you next time.