A strong conviction trade is being shaken. As international stocks are outperforming this year, global investors are asking if their faith in US exceptionalism has gone too far.
The contrast is most glaring when we look at China’s big tech. BYD Co., Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Xiaomi Corp., the so-called BATX after their acronyms that span electric-vehicle manufacturing, e-commerce to social media and video gaming, have risen 46% on average. By comparison, the Magnificent Seven stocks have barely registered any gains year-to-date.
The arrival of DeepSeek was a wake-up call to US politicians that China has not been left out of the global technological upgrade despite Washington’s stringent export controls on AI-related chip products. It was also a welcoming reprieve for asset managers. They can finally tell investors that while growth stocks rarely come cheap, they do exist.
Entering 2025, being long US big tech was by far the most crowded trade. But there was unease. A whopping 89% said US equities were overvalued, the most since at least April 2001, according to Bank of America Merrill Lynch’s latest fund managers survey.
Chinese tech now offers an alternative. Generative AI is not the only field where export controls have failed. Sales at US-sanctioned telecom and smartphone giant Huawei Technologies Co., for instance, jumped by 22% last year, the fastest growth since 2016. It’s beating Apple Inc. in China.
Or consider the auto space. EV makers are redefining what it means to be a luxury car. Xiaomi’s SU7 mimics Porsche Automobil Holding SE’s Taycan in power and braking, but includes AI that can help with parking and greet drivers with their favorite song. For all of its add-on features, Xiaomi sells for roughly half the price of a Taycan. Its stock is cheap, too. Despite the recent run-up, Xiaomi and fellow EV maker BYD trade at 45 times and 23 times forward earnings, respectively, versus Tesla Inc.’s 121 times.
Meanwhile, the US market has become expensive and distorted. A handful of tech names make up nearly a third of the S&P 500 Index. With the explosive growth in passive funds, which are often on the long side and disproportionally favor large caps, market concentration risk has become pronounced. In their need to diversify, global investors are certainly keen to find an alternative to the Magnificent Seven.
But Chinese government should by no means be complacent. While fund managers are ready to reshuffle their portfolios and lessen their dependence on US assets, it’s by no means guaranteed that they will come back to China. They might allocate to Europe instead — stocks there are starting the year with a bang as well, as traders bet on a ceasefire in Ukraine.
For now, Beijing is trying to soften its image. Last week, President Xi Jinping met with a group of tech titans, including Alibaba founder Jack Ma, China’s most high-profile tech billionaire. But while I doubt one staged photo op alone is enough to erase all the grievances investors have been feeling since the tech crackdown was first launched in late 2020, it's a start to try and release China from its value trap.
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