In a striking shift, foreign investors are increasingly turning their attention towards Chinese assets, marking a significant turnaround in sentiment. This trend has been underscored by a recent report from Goldman Sachs, which details a surge in optimism among hedge funds regarding the Asian stock markets. From February 14 to 20, these funds have ramped up their bets on Asia to levels not seen since 2016, with Chinese and Hong Kong stocks accounting for nearly half of the fund inflows during this period.

Another layer of this narrative comes from a survey conducted by Bank of America Securities in Singapore. A major asset management figure candidly acknowledged that a combination of factors—namely, the bubbling asset prices in the U.S., a lull in the Indian stock market, and a reversal in yen carry trades—are prompting a reallocation of global capital. Michael Hartnett, chief strategist at Bank of America, pointed out that the established dominance of U.S. equities in the global investment landscape is waning, shifting the focus towards markets like China, Germany, Japan, and South Korea, especially as global Purchasing Managers' Index (PMI) figures begin to rise.

The narrative continued to unfold in the stock market, with the overnight performance of U.S. indexes reflecting mixed responses: the Dow Jones Industrial Average climbed by 0.37%, while the Nasdaq Composite fared poorly, plummeting by 1.35%, and the S&P 500 dipped by 0.47%. This contrast was striking as Chinese assets gained strength against the overall trend, evidenced by the Nasdaq Golden Dragon China Index which rose by 0.58%. Notably, shares in Ideal Automotive soared by over 13%, and XPENG Inc. increased by more than 5%, while giants like Alibaba and Bilibili saw nearly 4% gains. Such bullish behavior came on the heels of a considerable downturn in Chinese stocks the previous trading day, raising eyebrows among strategists who interpreted China's artificial intelligence capital expenditures as a temporally extended growth phase.

The recent enthusiasm for Chinese equities underscores a broader recalibration of foreign investor strategies. In the same Goldman Sachs report, the uptick in bullish positioning relative to bearish stances showed a ratio of 1.5:1 during the specified range, with A-shares and Hong Kong stocks collectively representing almost half of the capital inflow to the region. Following closely behind were the Japanese markets, capturing 23% of the inflows.

The shift in perceptions is complex and multifaceted. High-profile strategists like Michael Hartnett have noted that the world's investment backdrop might be undergoing a fundamental transformation, particularly as investors pivot away from American stocks towards opportunities in regions like China and the aforementioned countries. The landscape has changed markedly over the past month, with A-shares and Hong Kong stocks outperforming their global counterparts, buoyed by the emergence of artificial intelligence models like DeepSeek, which have injected newfound vigor into tech stocks, igniting a wave of optimism that propelled the Hang Seng index to a three-year high.

Goldman analysts believe that the momentum is set to continue, projecting that Hong Kong stocks could further benefit from advancements in artificial intelligence, while A-shares still possess serious potential to catch up. They foresee that the dividend between the two might narrow, asserting that A-shares will offer better returns compared to their Hong Kong counterparts over the upcoming three months.

However, there was an evident fluctuation in stock performances, particularly evident when Alibaba and other Chinese stocks suffered considerable losses, leading the Nasdaq Golden Dragon China Index to drop more than 5%. Despite this pullback, several overseas strategists highlighted that the dip in Chinese tech stocks could provide advantageous buy-in opportunities, emphasizing a sustained expansion phase in China's artificial intelligence capital investments. Linda Lam, head of North Asia equities at UBP, noted that DeepSeek has presented a credible reason for a long-term reassessment of Chinese tech firms. Investors are beginning to ponder the magnitude of the profit potential that DeepSeek could bring in.

Kok Hoong Wong, head of sales and execution at Maybank Securities, remarked that the profit-taking in Chinese tech stocks might be unavoidable but could be perceived as healthy. He suggested that this dynamic will continue for the remainder of the year, with foreign capital likely gearing up to buy on dips.

A recent report by Bank of America Securities elaborated on this sentiment, revealing that interactions with Singapore investors have led to an emergent consensus: despite a lack of significant positive shifts in Chinese corporate earnings expectations—given that cloud service earnings per share were only adjusted upwards by 2% to 5%—global investors are compelled to enhance their exposure to Chinese assets.

The consensus has been encapsulated in a mantra of "selling American and Indian assets while buying into China," as investors seek refuge from issues like American asset bubbles, slowing Indian markets, and shifting yen trades. Data indicates that the MSCI China forward price-to-earnings ratio has surged from 10.2 to 11.6, recovering much of the ground lost since 2022.

Moreover, the artificial intelligence boom has emerged as a crucial catalyst in this development. While the real impact of AI on corporate earnings remains nascent, investor exuberance about its potential has led to a reevaluation of related technology stocks. The increases in price targets for cloud computing and data center firms primarily stem from a reassessment of valuation multiples rather than substantial revisions in earnings forecasts; this growth, driven by sentiment and fund flows, captures the essence of the current market paradigm.

Looking beyond anecdotal reports, a recent article by a British journalist shed light on the unchanged fundamental backdrop of the Chinese economy despite various challenges. There’s a growing recognition among investors that China remains a landscape ripe with investment opportunities. The article highlighted that China's stock market has begun to rally this year, leading global investors to query: Is China worth investing in? The resounding answer is yes, and it has been all along. Underestimating the world's second-largest market is a miscalculation; especially as foreign investors are now rediscovering China’s immense potential for innovation and opportunity across specific sectors.

Currently, there are over 250 companies in China with market capitalizations exceeding $1 billion and free cash flow yields above 10%, while there are fewer than 150 such companies in the United States. Notably, the majority of these 250 Chinese firms belong to non-tech sectors, indicating that investment opportunities extend far beyond merely technology and artificial intelligence. Furthermore, the share of large-cap companies within the landscape of Chinese listed firms remains comparatively low, presenting significant leeway for newcomers to enter the market. Among the 11 primary sectors, large-cap concentration in seven of these industries is lower in China than in the U.S., which implies smaller dominance by the top five firms in each sector. Additionally, the concentration levels within the Chinese tech industry are markedly lower than in the U.S., fostering an environment where startups like DeepSeek can thrive without being overshadowed by industry giants.