The global financial landscape is witnessing a shift, particularly in the realm of technology stocks as they navigate through waves of innovation and investor sentiment. In recent months, the rise of DeepSeek, a groundbreaking artificial intelligence model, has ignited fresh enthusiasm among investors regarding China's leading tech companies and their potential to embrace AI. This burgeoning interest reflects a broader trend that hints at a transformation in how investors assess growth versus risk in relation to Chinese tech stocks.
Market analysts affirm a notable change in perspective, as the focus migrates from merely evaluating risks associated with large Chinese internet firms to discovering their underlying growth potential. Jian Shi Cortesi, an investment portfolio manager at Swiss asset management firm Gam Investment Management, emphasizes this paradigm shift. “In focusing on Chinese large-cap internet companies, investors might shift from ‘considering risks’ to ‘considering potential’,” he notes, pointing out that the valuations of these firms remain significantly discounted compared to their American counterparts.
The upcoming earnings season is expected to serve as a catalyst for stock movements, especially as management teams share insights on their AI advancements and the rising demand for cloud services. Concurrently, the interest from options traders has surged, particularly towards Chinese tech stocks that are still hovering around historical lows. Data shows that trading volumes for the Hang Seng Tech Index options spiked last week, reaching their highest levels since early October. Notably, around 6,500 call contracts were transacted on one particular day, nearly double that of put contracts.
After a remarkable 9% rise in the Hang Seng Tech Index, it officially entered a bull market. Yet current projections place its price-to-earnings (P/E) ratio below 17, significantly lower than the Nasdaq 100's 27 and even beneath the Nasdaq's 25 five-year average P/E ratio. This stark contrast highlights the discrepancies within the tech market, marking a critical juncture for assessing investment opportunities.
Within this intricate financial tableau, the P/E ratio fluctuations of Chinese technology stocks draw considerable attention. Several contributing factors have been at play, creating a convoluted landscape for these valuations in recent years.
For instance, in the e-commerce sector, the competition has reached a fever pitch. Multiple platforms are racing to capture market share—engaging in price wars, optimizing service offerings, innovating business models, and exploring new markets. Such intense competition has compelled companies to allocate substantial resources, thereby exerting considerable pressure on overall industry profit margins, which in turn affects the valuations of related firms and applies downward pressure on the P/E ratio of Chinese tech stocks. The cloud services domain is no different; as cloud computing technology becomes ubiquitous, competition escalates among providers to secure customers, innovating across technical, pricing, and service quality dimensions. This mounting competitive pressure inevitably results in increased costs and squeezed profit margins, further contributing to the low P/E ratios observed in Chinese tech stocks.
Simultaneously, rising geopolitical tensions have fostered a climate of caution among investors regarding the Chinese stock market. Concerns surrounding international political stability have caused some foreign investors to adopt a more cautious approach, reassessing their portfolios and reducing capital allocations to the Chinese market. This reduction of interest has direct consequences on the liquidity dynamics within the Chinese stock landscape. Alex Au, Managing Director at Alphalex Capital Management, highlights, “The lack of interest and liquidity from foreign investors is one reason why the Chinese stock market has become a ‘value trap’.” In this context, tech stock valuations struggle to find robust support, perpetuating a cycle of depressed P/E ratios.
However, the emergence of DeepSeek marks a turning point—a beacon of possibility breaking through the prevailing gloom. DeepSeek’s introduction of a “low-cost + high-performance” open-source model has sparked a renewed wave of AI enthusiasm. With its remarkable performance paired with affordability, it has drawn global attention, particularly piquing the interest of foreign investors in Chinese tech stocks. On one hand, it accelerates the adoption of AI by companies and consumers alike—enhancing operational efficiency, streamlining business processes, and bolstering competitive capabilities for organizations. On the consumer's end, it translates to smarter, more convenient products and services. On the other hand, for larger firms, DeepSeek offers a pathway to significant cost reductions, aiding businesses in navigating fierce market competition while improving profitability.
Given users’ heavy reliance on cloud computing when running AI models, this evolution presents fresh prospects for cloud service providers like Alibaba and Tencent. As DeepSeek accelerates AI application adoption, the demand for cloud services is inevitably set to rise. Alibaba and Tencent, due to their robust technological foundation and extensive market presence within the cloud computing landscape, are well-positioned to harness business growth and gain additional market share in this new wave of AI advancement, thereby enhancing their valuation levels and infusing new dynamism into the P/E ratios of Chinese tech stocks. Alex Au concurs, stating, “DeepSeek has significantly aroused foreign investors' interest in Chinese tech stocks, which should help narrow the valuation gap.”
Alex Au asserted, “The introduction of a cheaper, more capable model like DeepSeek should promote AI adoption in China and spur both consumption and spending.” He believes that cloud service providers, such as Alibaba, stand to gain significantly from this shift.
Nevertheless, challenges remain for Chinese tech stocks, such as the pressure from U.S. tariff policies and restrictions on access to advanced semiconductors. However, the enthusiasm surrounding DeepSeek underscores that the focus doesn't always have to be on the highest levels of technology. Richard Clode, a portfolio manager at asset management giant Janus Henderson, articulates this sentiment, stating, “We have been seeking an exciting new narrative around Alibaba and Tencent, and we have now found one where they are indeed credible players in the AI space.”
