DeepSeek’s emergence has caused some jitters in US-quoted AI plays. China’s homegrown AI large language model has also prompted investors to chase after local AI-theme names, inspiring a broader gain in the Hong Kong and China markets.
However, in their Feb 10 report, DBS Group Research analysts Moxy Ying and Vanessa Lee are not convinced that the AI breakthrough in China will spark a sustained rally in China and Hong Kong, given hindrance from “uneven economic recovery and geopolitical tensions”.
The Hang Seng Index (HSI) fell below 19,000 in mid-January before rebounding to some 21,857 points today, largely driven by investors snapping up technology stocks especially those with an AI angle.
Investors ought to keep a close eye on changes in China’s fiscal policies to be announced at the upcoming National People’s Congress meeting later in February, according to Ying and Lee.
China’s economy is seeing a slowdown as its property sector remains in the doldrums. However, other aspects, such as consumer spending, have seen a pick-up.
If China’s domestic market stays resilient, and with US tariffs manageable for now, there is presumably less need for the country’s policymakers to introduce strong fiscal support, say the DBS analysts.
See also: UOBKH lowers TP for Delfi by 3% to 82 cents after earnings missed expectations
Rather than the fervour over AI, Ying and Lee believe that investments with short-term trading purposes are key drivers for both Hong Kong and China. Sustained outflows from foreign mutual funds and pullbacks in Southbound inflows last week reflect that.
The DBS analysts also observe that uncertainties in geopolitical tensions are keeping away foreign “long-only” investors, which is key for sustained market growth. As such, in their absence, Southbound flows are going to be an “influential force to the market”, state the pair.
Investors heading into Hong Kong via the “Southbound” flows primarily favour tech stocks, including AI beneficiaries, the DBS analysts say.
At the same time, China and Hong Kong stocks are deemed under-owned and now trade at cheap valuations, making them a natural consideration for investors.
High-conviction “buy” stocks indicated by the DBS team include Xiaomi, which has a growing presence in electric vehicles (EVs) on top of its consumer electronics; internet giant Tencent Holdings and electronics design solutions provider BYD Electronic International.
Other counters mentioned include leading PC maker Lenovo; a key parts supplier to Apple, AAC Technologies; AI infrastructure firms VNET Group and GDS holdings; enterprise resource planning software provider Kingdee International Software Group; and trading and e-commerce giant Alibaba.
For investors with a preference for high-yield counters, DBS’s picks are aluminium producer China Hongqiao Group, energy company China Resources Power Trading and leading financial services group and major HSBC shareholder Ping An Insurance. Firms in consumer staples like Tingyi and WH Group are on DBS’s list as well.
Tables: DBS
