Newsletter | March 2025 | The China Story: Outshining Global Markets

China’s AI Drive  

Morgan Stanley has highlighted China's recent technological advancements, particularly in Artificial Intelligence (AI), as a key driver of margin expansion and continued return on equity growth, even in the face of deflationary pressures.

In January, it took just one company—DeepSeek, a Chinese AI startup developing Large Language Models—to shake up global markets and trigger a bull run in the Chinese stock market. DeepSeek claimed that its AI models, particularly V3 and R1, operated at significantly lower costs compared to their US counterparts. The company asserted that its expenditure was just one-tenth of what major US players in the AI space, such as OpenAI and Meta, have spent on comparable models.

Private Sector Support  

In mid-February, the Great Hall of the People erupted with applause as tech business leaders stood and welcomed Chinese President Xi Jinping upon his arrival. His speech was seen as a significant gesture of support for the private sector and a confidence boost for the market. The highlight, however, was Jack Ma shaking hands with the president.

This moment was particularly significant as Ma had maintained a low profile since falling out of favour with Chinese authorities following the halted $50 billion Ant Group Initial Public Offering (IPO). The IPO was blocked after Ma made critical comments about Chinese regulators. Ant Group owns Alibaba, one of China’s largest companies, which also posted strong earnings results in February.

The relationship between Chinese authorities and the private sector has evolved significantly since the late 1970s, shifting from strict state control to a more market-oriented approach. Government initiatives aimed at stimulating the economy, such as monetary and fiscal stimulus measures introduced in late September 2024, have bolstered investor sentiment and sparked equity market rallies. 

The Made in China Impact   

In February, the MSCI China Index rose 11.2%, significantly outperforming the MSCI US Index, which declined 2.1% for the month, in rands. Investor risk appetite remains strong, though there appears to be a shift towards rotating positions within the same sector rather than exiting entirely.

In 2015, China launched the Made in China 2025 policy, aimed at transforming the country from a low-cost manufacturing hub into a global leader in high-tech industries by 2025. Nearly a decade later, the policy is showing significant progress, particularly in the information technology, robotics, and aviation sectors, which were central to the initiative. China’s global market share in these industries has increased substantially, and it now leads in several key areas.

China’s rapid advancements in high-tech sectors have intensified global competition, particularly in industries like copper smelting, where international firms are struggling to compete with China’s expanding capacity and lower production costs. Meanwhile, tariffs imposed on Chinese exports have escalated trade tensions with key partners, contributing to increased market volatility.

Still a Long Recovery Road  

The numbers appear impressive over a short period; the MSCI World Index has risen 11.9% since the end of February 2024, while the MSCI China Index has surged 34.6%. However, when viewed over a longer timeframe, there is still a considerable gap to close. In dollar terms, if you had invested US$100 in an MSCI World Index tracker fund, by the end of February 2010, your investment would have grown to US$480 by the end of February 2024. In contrast, the same US$100 invested in the MSCI China Index over the same period would have only reached US$175.

These indices followed a similar trajectory until 2020, but in 2021, a massive divergence emerged. While the US and global markets experienced a strong bull run, the Chinese equity market suffered significant drawdown. Several factors contributed to this underperformance:

• China’s aggressive crackdown on tech giants, such as Alibaba and Tencent, along with stricter state security measures on data protection and fintech regulation, alarmed foreign investors, triggering capital outflows.  
• The Evergrande property crisis exposed vulnerabilities in China’s highly leveraged real estate sector, leading to broader concerns about financial stability.  
• Slower economic recovery due to the Zero-COVID policy further dampened growth, restricting China's ability to keep pace with the rest of the world. While the recent rebound in Chinese equities is encouraging, long-term investors remain cautious as structural and policy-driven challenges continue to shape market sentiment. 

Markets in February  

In rand terms, the Nasdaq Index declined 3.2% for the month, while the MSCI World Index fell 1.2% and the S&P 500 Index dropped 1.9%. In contrast, the MSCI China Index posted a strong 11.2% gain, whereas the MSCI India Index tumbled 8.5%. The broader MSCI Emerging Markets Index fell 3.2%, as India's decline, along with weakness in other emerging markets, offset China's outperformance. Meanwhile, the MSCI UK Index and MSCI Euro Index recorded gains of 3.0% and 3.1%, respectively.

Locally, resource stocks pulled back after a strong start to the year, declining 6.2% for the month. Industrials rose 2.6%, while Financials edged up 0.8%. Property was down 0.3%, and Bonds recorded a modest 0.1% gain. The FTSE/JSE All Share Index ended the month flat at 0.0%, while the rand strengthened by 0.5%, closing at R18.57 to the US dollar.

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