
Belle Chang
- China equity rallied on the back of monetary and fiscal stimulus in September 2024, but the rally began to fade from October to January 2025. Escalating US-China trade tensions pose further downside risks to the economic outlook. However, China equity saw a strong performance (+11.4%) in February compared to the overall APAC region (-0.4%).
- The outperformance was primarily driven by a few industries – Technology, Consumer Discretionary and Telecommunications – with notable contributions from individual names like Alibaba, Tencent, and Xiaomi. The release of DeepSeek’s R1 AI models has boosted market confidence on the AI capabilities of Chinese tech firms. The positive earnings prospects for consumer tech products and EVs also contributed to the rally.
- While domestic macro challenges and external geopolitical uncertainties remain unsettled, market optimism has clearly risen on the back of Chinese AI developments. As the February rally wasn’t a broad-based one, fundamental research on the industry and sector level would be important for investors interested in the Chinese equity market.
Sep rally faded…
EXHIBIT 1: APAC EQUITY MARKETS TOTAL RETURN (USD, REBASED)
Source: FTSE Russell and LSEG. Data as of February 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
… as fundamental outlook remained challenged
It is true that the slowing trend in the monthly credit data has stabilised with January total social financing growth picking up for the second consecutive month. However, the increase was mainly driven by government bond issuance. PPI stabilised but remained in negative territory. Headline CPI fell to 0.1% y/y in December. More importantly, with domestic challenges remaining unsettled, external challenges from rising geopolitical uncertainty between the US and China further weighed on China’s growth outlook.
But China equity has outperformed since February
EXHIBIT 2: APAC EQUITY TOTAL RETURN AS OF FEB 28, 2025 (USD)
Source: FTSE Russell and LSEG. Data as of February 2025. Data numbers are 1M return. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
As shown in Exhibit 2, in February, China saw a strong return (+11.4%) and outperformed the FTSE Asia Pacific Index (-0.4%) and the FTSE All-World Index (-0.6%). The rally was not driven by further fiscal stimulus or major fundamental changes in the growth outlook. In fact, the positive contribution in February mainly came from industries including Consumer Discretionary, Technology and Telecommunications (Exhibit 3). The major drivers were optimism around an AI breakthrough in China by DeepSeek and the positive earnings outlook for consumer tech products and EVs.
EXHIBIT 3: FTSE CHINA INDEX TOTAL RETURN BY MAJOR INDUSTRIES (USD, REBASED)
Source: FTSE Russell and LSEG. Data as of February 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Technology stocks fell due to escalating US-China trade tensions after President Trump was re-elected as the US president in November. Uncertainty around US trade policies and expectations for a negative impact from US tariff hikes made the Technology industry one of the underperformers in Chinese equity. That said, since January 20th when DeepSeek released its ChatGPT-like R1 large language model with much lower costs, Technology stocks have led the rally in China as investors’ optimism about AI capabilities for Chinese firms grew. The Technology industry rose 14.0% in February, with the Software and Computer Services sector (ICB classification, Exhibit 4) being the main contributor. Moreover, Technology firms such as Tencent and Baidu have also reported integrating DeepSeek’s AI models into their services, raising market expectations that better AI adoption could likely boost the earnings of these consumer digital services firms. Tencent accounted for 14.5% of the FTSE China index and 0.9% for Baidu as of February 2025.
Consumer Discretionary rose 18.9% in February, with Alibaba (Retailers in Exhibit 4) leading the outperformance. The partnership between Apple’s iPhones and Alibaba on AI technology and features further spurred investor confidence in the growing capabilities of Chinese AI. Additionally, President Xi’s meeting with some leaders of Chinese tech firms, which included Alibaba and DeepSeek, signaled the government’s endorsement of the private sector. Alibaba accounted for 10.9% of the FTSE China index as of February 2025.
Lastly, the Telecommunications industry has continued its strong performance since October 2024, driven primarily by Xiaomi (Telecommunications Equipment in Exhibit 4). Since 4Q24, Xiaomi has led the Telecommunications rally due to the positive outlook for its EV sales and smartphone businesses. The government’s consumer goods subsidy program is also expected to boost the firm’s smartphone sales. Telecommunications rose 27.6% in February and 64.6% over the last three months. As of February 2025, Xiaomi accounted for 3.4% the of FTSE China index.
EXHIBIT 4: 1M TOTAL RETURN CONTRIBUTION – TOP 10 SECTORS* (USD, ICB CLASSIFICATION)
Source: FTSE Russell and LSEG. Data as of February 2025. Past performance is no guarantee of future results. Please see the end for important legal disclosures. *Sector as per ICB classification
In conclusion
China’s outperformance of 11% in February vs -0.4% for APAC and -0.6% for the FTSE All-World Index was encouraging for investors. Even the US equity (FTSE USA Index) saw a 1.5% decline in February. Optimism around Chinese AI advancements and positive earnings prospects for consumer tech products and EVs were the main drivers, despite broader macroeconomic challenges. By industry, Consumer Discretionary, Technology, and Telecommunications led the gains, with notable contributions from individual names like Alibaba, Tencent, and Xiaomi. The release of DeepSeek's AI models and their integration into these firms have boosted market confidence, highlighting the potential for future growth in these private sectors. While domestic macro challenges and external geopolitical uncertainties remain unsettled, market optimism has clearly risen on the back of Chinese AI developments. As the February rally wasn’t a broad-based one, fundamental research on the industry and sector level would be important for investors interested in the Chinese equity market.
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