China's Tech Revaluation: Are Investors Overhyped?

The Hong Kong stock market has been strong, with $HSTECH(HSTECH)$ and $HSI(HSI)$ rising significantly after the Chinese New Year, outperforming $SHANGHAI SHENZHEN 300 INDEX(399300)$

This round of market and the September-October market

Similarities

1. Drivers: Both rounds were driven by sentiment.

   The September round was driven by a rapid shift in aggregate policy and expectations, which triggered high market sentiment and drove the Hang Seng Index sharply higher;

   This round, on the other hand, it was DeepSeek-induced sentiment on technology and China asset revaluation that drove the market upward.

2. Funding Characteristics:

   In terms of fund flows, southward funds in the two rounds of the market have inflows, but there are internal differences; active foreign capital have not become the main force of the rise, this round is still in the outflow; passive ETF funds inflow increase, trading funds or stage main force.And the movement of these two types of funds can not represent a change in the views of long-term foreign investment.

Differences

1. Board performance:

   The September market was dominated by financial and real estate cyclical stocks, and the market rally was broad-based, with over 60% of HKEx stocks outperforming the index;

   The current round of market is concentrated in the technology sector, only 20% of the HKEx stocks outperformed, mainly in the technology consumer and healthcare sectors, the old economy and traditional sectors underperformed (expected to make up for the rally?).

2. Constituent performance: 18% of the constituents of the Hang Seng Index outperformed the index in this round, contributing more to the rise of the HSI, while the rest of the constituents had limited gains; the degree of divergence in the performance of the constituents during the 924 market was relatively small.

Prospects and Trends of China's Asset Revaluation

Static

Currently there is a short-term overdraft in market sentiment and valuation, technical indicators show overbought, and the Hang Seng Index risk premium is close to its previous high.Measured by the risk premium, the Hang Seng Index is about 23,000 points, and if you consider the technology sector optimism, up to 25,000 points.However, this does not mean that the market will stagnate or retrace when it reaches this point. Subsequent rallies will require more optimistic expectations and greater volatility risk.

Dynamics

Realization of long-term tech trends and macro narratives is key.China is in the stage of stabilizing leverage, if the AI industry continues to develop, it is expected to form a structural market similar to the past.

Further market proliferation, on the one hand, relying on science and technology to solve macro problems, enhance total factor productivity and natural interest rates, which is a long-term process; on the other hand, the need for aggregate macro policy with the markup, the two sessions is an important observation window.

$Goldman Sachs(GS)$ view:

• Valuation Differences: Chinese tech companies are currently valued at a significant discount compared to U.S. tech stocks.

• Liquidity situation: Current liquidity is supportive of the market, but it is far from extreme.Meanwhile, Goldman Sachs' (GS) private banking (PB) position remains at multi-year lows.This suggests that there is room for further market inflows and the potential for Goldman Sachs PB to subsequently increase its position and commit more capital, all of which will provide financial momentum for the market to rise.

• Market Sentiment Indicators: The proxies for retail sentiment and the H-share Risk Barometer are both well below the levels of the September 2024 market.This reflects that current market sentiment is relatively cautious and not overheated, and there is room for further sentiment improvement.

• Policy expectations: about two weeks after the "two sessions" will be held, may bring potential policy surprises.

Nomura's view:

• Valuation picture: Despite the strong rally in Chinese tech stocks, they remain reasonable relative to their own history and to U.S. tech stocks.The Hang Seng Technology Index is currently trading at a forward P/E of 17.3x and an enterprise value multiple of 1.1x, below its own historical average and significantly lower than the Nasdaq's 28.2x and 4.5x;

• MARKET PERFORMANCE DRIVERS: Asian investors are refocusing on Chinese tech stocks on the back of AI innovations such as DeepSeek. ai innovations have refocused investors on the technological prowess of these companies, prompting a reassessment of their tech assets and investments.

• There may be a brief pullback, but as long as the positive narrative continues and tensions between the US and China do not escalate (e.g., issues such as tariffs or chip / tech sector restrictions), investors should selectively add Chinese tech stocks to their portfolios.as they are relatively unaffected by Trump's tariffs, benefit from an eventual recovery in domestic demand, have strong balance sheets and are reasonably valued.Two Chinese stocks, $Alibaba(BABA)$ $BABA-W(09988)$ and $TENCENT(00700)$ have performed well in the underlying model portfolios.

Other key points

1. Sector rotation: In addition to focusing on the technology sector, it is also important to pay attention to the performance of traditional sectors in different market environments and rotation opportunities.

2. International factors: US January PCE, China February PMI and other data will have an impact on the market, we need to pay close attention to changes in the international macroeconomic situation.

3. Investment strategy: you can wait and see position moderate profit taking, continue to pay attention to the catalysts in the field of science and technology and the two sessions of the policy signals, reasonable adjustments to the investment portfolio.