Mike Willans, Head of Equities, examines potential opportunities within Chinese equities in light of recent market and Chinese policy developments.
China is at a compelling moment in time which, in our view, gives us a rare opportunity to buy dominant consumer tech names at dramatic discounts to their US peers. Of course, there are risks, such as stability concerns for the property market and sentiment towards Chinese equities, which is the very reason that both the markets and individual names are so out of favour and on such low valuations.
Whilst we are mindful of these concerns, it is also clear that the Chinese authorities are committed to stabilising the property market, and have directly targeted the equity market in policy statements. There is a clear feedback loop between asset prices and consumer confidence and, as such, these seem like very important steps forward. However, despite our confidence in the domestic situation, there is also the ‘Trump effect’ and the daily ‘noise’ on tariffs, which at least appears to be less extreme than first feared.
On the technology front, in January came the dramatic announcement of a private Chinese company, DeepSeek, which had developed a leading-edge AI despite limited access to cutting edge GPUs, using creative engineering built on open-source architecture. To say this was a surprise to investors is an understatement, and it quickly led to sharp declines in US tech names, most notably, Nvidia, a key beneficiary of AI spend.
In essence DeepSeek has raised two questions: is AI as semiconductor-intensive as previously supposed and second, can more efficient AIs be developed in areas of the world outside the US? The debate for us is that the US dominance of tech and AI is reflected in very high valuations, which are largely justifiable in our view. Meanwhile, conversely, the very out-of-favour Chinese tech sector is on near single digit price-to-earning (PE) ratios, at a time when China now seems to be in the game.
The final piece of the jigsaw for us was a meeting on Monday 17 February when President Xi called together a group of company heads, including Alibaba founder Jack Ma. For us this is a very clear signal that China needs these very strong technology leaders, of both electric vehicles (EVs) and broader e-commerce. We infer that the regulatory and support regime for these companies will become much more positive in coming quarters, and note a certain similarity to Trump’s inauguration surrounded by tech billionaires. China has a whole range of large dominant companies who are untouchable domestically, with user numbers that any other country could only dream of. For example, Alibaba’s 1.3bn users demonstrates the immense strength of the brand, which is reflected in a 54% market share in the payments space via Alipay, its digital payments platform. There are also other names on surprisingly low valuations: Baidu in the search space and PDD in the low-end e-commerce arena. That both these latter companies can be bought for 10x earnings defies belief for us.
Putting this all together, China currently has a cheap market, cheap technology names and an increasing likelihood that the economy will stabilise. Even before we examine the names available, this seems like an interesting situation. We have raised our China exposure to 5% of the WS Canlife Global Equity Fund and CL Global Equity Fund with a variety of these names (including Alibaba, which has a US$300bn market cap, 12.9x forward earnings, 20% EBITDA margins and is one of the largest active positions in the WS Canlife Global Equity Fund). Despite a rapid rise from very depressed levels so far in 2025, these names are still compellingly cheap compared to their own history and equivalent US peers.
More information on the funds can be found here.
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