A recent article by Nikkei Asia, “China’s ‘Seven Titans’ tech stocks slump as deflation overpowers AI boom” (scan QR code), laid the blame for the titans’ sluggish performance on deflationary pressures due to weak domestic demand. This is an oversimplification. While it is true that China’s economic involution, characterised by a cut-throat, fight-to-the-death price war, has contributed to weakening corporate profitability, the underlying root cause is less about domestic demand than it is about the fact that China is building intensely competitive and deep industry ecosystems. This is precisely the core thesis of our main article.
It is clear to us now that, at least for the near term, the underperformance of Chinese tech companies is structural. Consequently, we have sold most of the Chinese stocks in our two global portfolios and will be adding US tech stocks. This strategic decision reflects the arguments in this article, as well as those in the previous week, where despite the huge gains in stock prices, valuations for US tech are supported by the strong rise in earnings.
Next week (the second part on this topic), we will explain why US tech monetisation of innovation can be more resilient than most assumed.
