Jefferies: China and Europe would continue to outperform
Christopher Wood, head of global equity strategy at Jefferies, says China can be a cyclical bull market comeback, but the key is for consumer mindsets to change from pathologically cautious to moderately cautious.
While the CSI 300 Index has a chance of rising to 6,000 (compared to 3,934 on Monday’s closing), Woods also expects positive catalysts in Europe, pointing out that the U.S. stock market will not be done well exclusively this year.
The focus of Jefferies’ sixth annual Asia conference last week is China, thanks to the outperformance of Hong Kong and China stock markets and the emergence of DeepSeek, which many believe China is able to challenge the US in artificial intelligence (AI).
”DeepSeek is a big deal for the mainland and Hong Kong,” said Wood, noting that Microsoft taking a stake in ChatGPT's parent company, OpenAI, in early 2023 triggered an AI theme in the global stock market, which has brought a new story, but the main beneficiaries have been US stocks.
In recent years, large US tech firms have been competing to invest capital in AI, which he described as an AI “military competition,” and the best investment strategy would naturally be to invest in companies that are “selling picks and shovels”. Nvidia became a hot stock as money – be Japan, South Korea, Europe or Hong Kong - are flooding into the United States.
After Donald Trump won the U.S. presidential election last November, the market has great expectations for his tax cuts, lax regulatory policies and America First policies. All these have pushed the so-called U.S. Exceptionalism to its peak, with the US stock market value accounting for 67% of the world's stock market capitalization at an all-time high, which does not match the U.S. economy's share of the world.
Wood says this also set the stage for global capital to reallocate portfolios, coinciding with the triggers of reversal of weakness in Europe and China, where stock market valuations are low.
”DeepSeek highlights the massive disruption potential of AI. For the simple reason that DeepSeek produce this thing so cheaply at US$6 million, even if they even if it costs them 60 million. And so, this has raised question marks on the amount of money the full hyperscalers projected to spend 320 billion U.S. on the AI capex arms race,” says Wood.
“If you haven't bought Alibaba already, you needed to buy it.”
Wood believes that the price-to-earnings ratio of China's stock market, which was just eight times before the big rally started in late September and October last year, is now back to its five-year average, but not too expensive.
The key to the market will be whether consumers can improve on their extreme caution. The psychological factor of “pathologically caution” may be related to the epidemic's closure of cities and towns, which has left a traumatic legacy that should not be underestimated, as well as the sluggishness of the property market.
He points out that the mainland government had done a lot to boost the economy, and one of the key measures was to allow local governments to replace their debts on a large scale. In recent years, local governments have been in financial difficulties due to a drop in revenue from land sales, and delays in payment of debts to enterprises and salaries of public servants have impacted the economy and consumption.
Now that the central government is helping local governments to solve their financial problems, he believes the situation should improve. In addition, property prices in first-tier cities have bottomed out.
Wood believes that every country will be a loser if the US tariffs are implemented as planned on April 2. The prospect of tariffs will be a trillion-dollar issue, which he is inclined to believe that this may just be a massive negotiating tactic on Trump's part.
As for the European stock market, Wood says that after the German federal election, the new government is determined to increase the fiscal deficit, which is beyond market expectations and is the biggest fiscal policy revolution in Germany since the Second World War. This will be very favorable to European cyclical stocks, especially banking stocks, even though the rate cut by the European Central Bank will not be as much as the market expects.
Therefore, with the positive catalysts in Europe, the chance of improving China-EU relations, and China's increasingly diversified trade, which will not be affected too much even if it is sanctioned by the US, Wood estimates that the Chinese and European stock markets are expected to continue to breathe a good sigh of relief this year.
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