AI Transforms China Stocks: Goldman Sachs on DeepSeek-R1 Impact

Goldman Sachs, a leading global investment bank, has made a significant upward adjustment to its target for the MSCI China index. The bank attributes this revision to the profound impact exerted by the newly launched Chinese artificial intelligence (AI) model, DeepSeek-R1, along with other competitive and cost-effective AI technologies emerging from China.

The advent of DeepSeek has acted as a powerful catalyst, triggering a remarkable surge in Chinese technology stocks. This has, in turn, elevated investor confidence significantly, as they anticipate the substantial growth potential and economic benefits that AI is set to bring to the region. In the past month alone, the Hang Seng TECH Index has witnessed an impressive rally of 27%, while the MSCI China Index has recorded a gain of 19%.

Since the debut of ChatGPT in November 2022, U.S. equities have demonstrated extraordinary performance, surging by a substantial 50% and contributing an approximate $13 trillion increase to the market capitalization. Analysts at Goldman Sachs opine that artificial intelligence has the potential to be a major driving force behind corporate profits, equity multiples, and the flow of investment portfolios.

"We project that the widespread adoption of AI has the potential to boost China's earnings per share (EPS) by an average of 2.5% annually over the next ten years. The improved growth prospects, coupled with a possible boost in investor confidence, could lead to a 15-20% increase in the fair value of Chinese equities. This, in turn, might attract over US$200 billion in portfolio inflows," stated Kinger Lau, Chief China Equity Strategist and Managing Director at Goldman Sachs, in a note dispatched to clients.

Consequently, Goldman Sachs has revised its target values for the MSCI China and CSI300 indices. The new targets stand at 85 for the MSCI China index and 4,700 for the CSI300 index, suggesting potential upside movements of 16% and 19% respectively over a 12-month period.

While artificial intelligence presents a promising pathway for China's growth trajectory, Kinger Lau emphasized that strong and consistent policy stimulus remains essential. Such stimulus is crucial for effectively addressing the country's macroeconomic challenges and ensuring the sustained growth of equity markets.

To gain a more comprehensive understanding of the AI ecosystem in China, Goldman Sachs has categorized the country's listed companies into two broad groups: AI Tech and Non-Tech. These groups are further subdivided into six thematic cohorts, namely Semiconductor (Semi), Power & Infrastructure, Data & Cloud, Software (ETR:SOWGn) & Application, Revenue Growers, and Productivity Gainers.

For investors with a keen interest in the Chinese AI sector, Goldman Sachs has identified the Hang Seng TECH Index and CSI 1000 as key benchmarks. These indices are noted for having the highest representation of technology and AI-related companies.

Among the various sectors within the AI ecosystem, Goldman Sachs expresses a particular preference for the Data & Cloud and Software & Application sectors. The bank anticipates that as the AI capital expenditure cycle stabilizes and moderates, the creation of practical use cases and the process of monetization will accelerate at a faster pace.

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