The rise of DeepSeek, a prominent player in the tech landscape, is sparking renewed interest in China's stock market, potentially attracting more capital from both domestic and international investors.

According to analysts, innovations in China's AI sector are expected to attract more capital into the stock market, especially given the current low valuations, light positioning, and recovering earnings cycles.
 

DeepSeek as a Catalyst

Analysts forecast that the rise of DeepSeek will act as a catalyst for global investors to increase their allocations to Chinese stocks. Liqian Ren, head of quantitative investment at WisdomTree, noted, “People are starting to see that allocating to Chinese assets could be profitable.” She highlighted China's impressive performance in innovation, particularly in areas like drug development, which is poised for progress in the coming years. “DeepSeek is just the tip of the iceberg,” she added.
 

Market Impact and Valuation Discrepancies

China’s stock market analysis: DeepSeek, a Chinese AI startup, unveiled an open-source model in January, impressing many American tech investors with its cost-reducing capabilities despite U.S. export controls on advanced semiconductors. Following this, NVIDIA’s stock plummeted about 17% on January 27, marking its worst single-day performance since 2020, leading to declines in global tech stocks.

David Chao, global market strategist at Invesco Asia-Pacific, commented on February 3 that this development raises questions about the value of current massive investments in AI. He predicted that the high concentration in U.S. stocks is likely temporary and recommended an equal-weight strategy, focusing on U.S. small-cap stocks while increasing exposure to Chinese stocks. He stated, “Chinese stocks, especially tech companies, are significantly undervalued compared to their U.S. counterparts, and as the AI gap narrows, so will the valuation gap.”
 

Implications for Chinese Stocks

Louis Luo, head of multi-asset investment solutions at Aberdeen in Greater China, pointed out on February 5 that DeepSeek demonstrates how Chinese tech giants are building competitive AI models similar to those in the U.S. This development is tactically positive for the MSCI China Index, which features low valuations, light positioning, and a recovering earnings cycle.

While DeepSeek is not yet publicly listed, analysts anticipate that several Chinese stocks will benefit from domestic AI advancements. JPMorgan's China strategists expect that the proliferation of AI applications will encourage consumers to purchase new smartphones more frequently.
 

Renewed Interest Amid Uncertainty

Despite uncertainties surrounding U.S. tariffs, Liqian Ren noted that global investor interest in the Chinese market began to rebound following stimulus measures announced at the end of September last year. She emphasized that the difference now lies in DeepSeek's recent AI breakthroughs, showcasing the innovative capabilities of Chinese private enterprises.

As of last Thursday's close, the WisdomTree China Non-State-Owned Enterprises Fund (CXSE) was up nearly 4% year-to-date, while the Bosera fund tracking high-dividend state-owned enterprises fell over 3.5% during the same period. Data from Allianz Global Investors indicated that state-owned enterprises in China had outperformed non-state enterprises for three consecutive years prior.

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