Last year I highlighted a key candidate for a 2025 Surprise.
Last week I was surprised to see this theme apparently coming into play from a surprising catalyst.
We’re talking about upside in Chinese stocks (and maybe even downside in US stocks) — something which I still get the sense is a very outside-of-consensus view, and certainly jars against the mainstream media-market narrative…
As a refresher the thesis basically states: valuations are cheap in China, expensive in the US, and hence we can deduce consensus as expecting great things from America and not much from China.
Meanwhile, on the macro, Trump 2.0 is not necessarily good for US stocks in the medium term given heightened policy uncertainty, probable contractionary fiscal policy, and a much much higher hurdle from stretched valuations and sentiment vs the last time he entered office back in 2017.
As for China, they are just coming out of recession now and their property market is turning the corner after a prolonged and deep downturn. Add to that the strong likelihood that probable incoming tariffs will prompt them into stepping up stimulus, and you have a positive monetary/macro story paired with cheap valuations.
Now as to the surprising catalyst, China’s own AI breakthrough DeepSeek is a watershed moment for market perceptions. It rattles the notion that China can only imitate and not innovate, and serves as a reminder that the country boasts millions of STEM graduates each year, and at the very least has big potential in tech and R&D.
The truth is if you visit China you see innovation and progress everywhere, you see and hear people wanting to make their life better, and you see raw capitalism and intense competition everywhere you look. Most Westerners’ perception on China is plain wrong, whether due to outdated info or intentional misinfo, the average investor outside of China does not get the dynamism or ambition that exists there.
But back to the numbers, the DeepSeek paradigm-shock not only serves to rattle the notion of US tech supremacy, but more pragmatically highlights the prospective upside in Chinese tech stocks.
Unlike the rich valuations seen in US tech, Chinese tech stocks are trading at the bottom end of the historical range; and in recent years have seen much stronger upside than non-tech during China’s characteristic procession of ON/OFF bull markets.
So to sum up, the surprise within the 2025 surprise is that Chinese tech stocks could be at the epicenter of a potential new bull market in China.
Key point: It’s time to have a rethink on the upside in Chinese (tech) stocks.
BONUS CHART — China vs USA Tech Stocks
The chart below shows the path of US vs Chinese tech stocks. The funny thing with markets is that often the prevailing narrative is shaped more by price than anything else, and in that respect given what I outlined on narratives and perceptions above it’s probably no surprise to see the divergent paths here.
It’s another prompt to have a rethink with regards to a possible closing of the gap in that chart (whether by China catching up or US catching down, or some combination), and also a reminder of the twists and turns in markets (i.e. they don’t just go in a straight line!).
Just remember, the trend is your friend — until it bends.
And things might be about to get bendy.
