In an era marked by rapid advancements in technology, the recent surge in interest around artificial intelligence (AI) is reshaping how global investors perceive the potential within China's tech landscapeThe emergence of DeepSeek, a pioneering AI technology, is particularly noteworthy, as it draws attention to investment opportunities that were previously overlookedMajor investment firms, including Morgan Stanley, have shifted their perspectives, indicating a newfound awareness of the potential for AI in China, devoid of the necessity for massive capital investments traditionally associated with technologyThis revelation signifies a profound shift in investment principles concerning the tech sector.

Morgan Stanley, previously reflecting skepticism regarding the Chinese stock market due to trade tariffs and resulting uncertainty in profitability, has reversed its stanceThey suggest that China's AI sector, equipped with an extensive pool of engineers, rich data resources, and an established ecosystem of social networks and e-commerce, is on the cusp of significant growthChief China equity strategist Wang Ying mentioned in a recent communication that the competition between China and the U.S. has been recalibrated, focusing less on tariffs and more on high-end manufacturing and, increasingly, AIThis evolution invites a refreshing investment logic that could help narrow the technological gap between the two economic titans.

Interestingly, recent investor communications have unveiled a more durable shift in investment thinking, suggesting an increasing reliance on fundamental investment rather than short-term speculative plays driven by governmental stimulus

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As market dynamics change, there’s a palpable optimism regarding AI and tech stocks, sparking remarkable growth in relevant Hong Kong and Chinese American Depository Receipts (ADRs). The Hang Seng Tech Index reportedly surged over 25% from its starting point this year, almost returning to peak levels that characterized a prior surge tied to stimulus measures.

A Surge of Southbound Investment into Hong Kong's AI Sector

In this context, Hong Kong’s stock market has shown extraordinary momentum, especially within China’s cloud computing and internet sectors, which are prominent players in the AI sphereThe influx of capital has propelled Hong Kong into a technical bull market, with notable spikes in stock values reflecting the growing attractiveness of technology investments.

Miao Zimei, head of Greater China equities at Janus Henderson Investors, highlighted the significant impact of DeepSeek’s efficiency improvements in computationThis enhancement is pivotal to making AI technologies more accessible and economical for widespread adoptionThe rise of DeepSeek and corresponding AI advancements signal a transformative era within China's technology landscape, where AI companies are setting new standards for efficiency and innovation, crucial in attracting global investor interest.

Despite the excitement circling around AI in China, many foreign asset managers remain cautious, often preferring longer evaluation periods before committing capital

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However, the sentiment is evidently shifting, with increased interest noted from investors located in mainland China, who are actively engaging in stock movements in anticipation of future capital gains.

Data shows that in 2023, southbound capital into Hong Kong was robust, with a net influx of $17 billion primarily directed towards technology and communications sectorsOver recent months, the average net inflow has doubled, illustrating a potentially significant reallocation of funds towards these fast-growing segmentsNotably, IT and communication services have seen an increase in investment, signaling robust expectations for future performance.

Morgan Stanley further identifies that as of January 31, global long-term funds are still underweight in the IT and communication services sectorsThe bank suggests that due to fewer trading days from the recent Lunar New Year holiday, there is an acute underweight concerning A-shares, indicating a potential reconsideration of investment opportunities in the domestic market moving forward.

Alibaba's Impressive 8% Surge Fuels Market Enthusiasm

On the heels of these developments, Alibaba's stock, a representative leader in China's tech landscape, recently surged by over 8%. This rise was significantly motivated by the pressing realization among investors that cloud services represent a critical foundational infrastructure

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As Alibaba Cloud emerges as a beneficiary in the ongoing AI revolution, news of potential collaboration with tech giant Apple over their Apple Intelligence initiative further solidifies its relevance in the AI arena.

Chelsey Tam, a seasoned equities analyst at Morningstar, discussed the implications of the partnership between Alibaba and AppleShe emphasized that this collaboration underlines Alibaba's prowess in the AI domain and validates its competitiveness with the launch of products like Tongyi Qianwen 2.5 MaxSuch strategic alliances with top-tier partners are crucial for navigating the challenges in the Chinese market while revitalizing iPhone sales through high-quality offerings.

Although specific details regarding the commercial partnership remain undisclosed, the general sentiment suggests that Alibaba's collaboration with Apple could set a benchmark within the industry, prompting further interests from other companies seeking associations with Alibaba.

There is an overarching optimism about Alibaba's future amidst expectations of increasing computational demands driven by AIAlibaba Cloud is positioned at the forefront of these developments, with speculation surrounding its potential independent listing growing stronger due to its core operational importance within the Alibaba ecosystem.

Due to DeepSeek's rise, the demand for AI model training and inference is intensifying

Leading cloud service providers in China like Alibaba Cloud are likely to see substantial benefits from the swift expansion of the AI industryIn particular, Alibaba Cloud boasts proprietary AI chips and provides high-end GPU cloud services, which are becoming essential options for AI enterprisesFurthermore, as more Chinese firms develop AI models, it's expected that many will opt for Alibaba Cloud's flexible computing resources instead of investing in their data centers.

A senior analyst from an overseas equity research firm remarked that while U.S. stocks generally appear overvalued, the fundamentals of China's tech stocks demonstrate potential for re-rating, signaling lucrative opportunities within this sectorAs analysts scrutinize the evolving landscape, they observe significant room for recalibration in valuations for Chinese technology assets.

In the long run, with the continued proliferation of large models in China and the influx of new applications, cloud services will increasingly materialize as a pivotal piece of infrastructureAs the largest cloud service provider in China, Alibaba Cloud stands to benefit significantly due to its expansive open ecosystem and comprehensive B2B client baseThe company’s valuation metrics, such as a price-to-earnings ratio of just 10 and a price-to-book ratio of 1.5 during the recent Lunar New Year period, reflect historical lows, steering investor interest towards Alibaba amidst macroeconomic uncertainties.

A Comprehensive Bull Market Remains Tied to Macroeconomic Recovery

Nonetheless, it is essential to recognize that the market has yet to materialize a comprehensive bull market

The divide between AI/technology stocks and traditional equities remains stark, with expectations of gradual macroeconomic recovery influencing long-term outlooksAnalysts point out that continued attention must be directed towards the recovery in consumer sentiment, the effectiveness of forthcoming stimulus measures, and evolving geopolitical risks.

Wang Ying noted that if you exclude the Hang Seng Tech constituents, a customized Hang Seng Index would remain approximately flat based on equal weight, with a mere 3% increase year-to-date in market capitalization weighted computationThis observation indicates that the recent rallies within the index heavily rely on the performance of AI and technology stocks, while other sectors continue to lag behind.

In the near term, the pronounced market differentiation is expected to persist, owing to inflationary trends maintaining downward pressure on traditional sectors while consumer sentiment remains subduedFollowing the Lunar New Year, macroeconomic data and new housing sales haven't demonstrated signs of notable improvement, casting uncertainty over broader bullish opportunities.

For instance, Hainan duty-free stores and specific food and beverage categories exhibited weak sales during the New Year holiday, indicating that consumer confidence remains fragileMoreover, January real estate sales, adjusted for the holiday effects, reflected a deceleration, with housing prices also showing signs of weakeningWith expectations of a policy vacuum in the upcoming days, concerns over sluggish macroeconomic indicators may suppress broader optimism across sectors.

"Innovations in technology such as AI, humanoid robotics, and smart electric vehicles are likely to drive the government to maintain focus on manufacturing and tech spending," Morgan Stanley emphasized, outlining key risk factors worth monitoring

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