The two major investment banks on Wall Street updated their ratings on the Chinese market after being shocked by Deepseek from China. On Tuesday, Goldman Sachs emphasized in its research report that the MSCI Chinese Index has a potential of 14% increase this year, and the next day, Deutsche Bank joined the Bullish ranks.

The MSCI Chinese Index is currently around 66 points. Goldman Sachs expects that under neutral expectations, the index could increase by 14% to 75 points this year, while under optimistic expectations, the increase could soar to 28%.

Deutsche Bank reinforced in its latest report that Deepseek represents the "Sputnik moment" for AI, but more like China's "Sputnik moment" because it proves the value of China's intellectual property. China's advantages in high value-added areas and its dominant position in the supply chain are expanding at an unprecedented speed.

Sputnik refers to the successful launch of Sputnik 1 by the Soviet Union in 1957, which defeated the USA and entered space first.

Deutsche Bank's report points out:

"2025 should be the year when the investment community realizes that China is leading in global competition. They will find it increasingly difficult to deny that Chinese companies provide cost-effective and high-quality products in several manufacturing and service sectors."

Deutsche Bank expects the "valuation discount" of Chinese Stocks to disappear, with profitability potentially exceeding expectations due to Consumer support policies and financial liberalization. Deutsche Bank therefore expects that Chinese A-shares and Hong Kong stocks may continue to Bullish trends and correct the current undervaluation.

This year, China's Assets performance will surpass that of other regions. The bull market for A-shares and Hong Kong stocks has begun in 2024, and in the medium term, it will exceed previous peaks.

Goldman Sachs is more bullish on the symbols of China's Technology Stocks. Goldman Sachs believes that a brighter growth outlook and technological breakthroughs will lead to significant productivity improvements, helping to narrow the valuation gap of up to 66% between US and Chinese Technology or Semiconductor Stocks.

The black line in the chart reflects the changes in PE values for China's soft Technology Stocks, the gray line reflects the PE values for China's hard Technology Stocks, and the blue line represents the PE values for the seven major Technology Stocks in the US.

Goldman Sachs believes this means that Chinese Technology Stocks have a 20% chance of returns after being revalued, with stocks in the soft Technology sector leading the market, and the overall growth of China's stock market could reach up to 7%.

Future Growth Drivers.

In summary of the two reports from Goldman Sachs and Deutsche Bank, there are ample growth drivers for China's market in the future. On the policy front, China’s fiscal policy has shifted to an accommodative stance since September last year, providing a foundation for the rise in the stock market.

Goldman Sachs emphasizes that China's policy cycle has now transitioned from expectation to implementation, with details and actions being key factors for stabilizing growth and supporting corporate profits, which will drive further stock market increases.

Moreover, China's manufacturing industry has an unshakable advantage globally, with abundant resources in cutting-edge technology, the number of patents, industrial clusters, and talent. It has also established a certain scale in the electric vehicle, AI, 5G, and 6G telecommunications sectors, further stabilizing the foundational value of China's Capital Markets.

In addition to advantages in policy and manufacturing, China has opened new market growth potential for exports through the Belt and Road Initiative Concept, with Central Asia, West Asia, and the Middle East being huge opportunities for China’s future export of commodities and services. Coupled with the gradually awakened potential in domestic demand, the increase of 10 trillion dollars in savings over the past four years will strongly drive the development of China’s Consumer and Capital Markets.

When discussing the currently most concerning Sino-US trade war, Deutsche Bank and Goldman Sachs also show unexpected optimism.

Goldman Sachs pointed out that if President Trump of the USA imposes tariffs of up to 60% on China as planned, the performance of MSCI Chinese Index components will be reduced by 21%; however, if China and the USA can reach an agreement, then the PE of the index will expand to 12 under the baseline scenario, indicating a Market Cap increase of 14%.

Deutsche Bank further emphasized that the reality of the Sino-US trade war is much more optimistic than imagined, as the Trump administration values tactical victories more, thus he will set a strict stop-loss amount.

Deutsche Bank predicts that the emergence of Deepseek will also strike a blow to Trump's belief in containing China, so the US government may encourage trade policy to revert to a more classic Republican stance after prolonged discussions, to stimulate business by reducing regulations, cheap energy, and relatively low barriers to importing intermediate products. Overall, before the US mid-term elections, its stance may become more favorable to Trade.

Deutsche Bank also emphasizes that the current trading price of the MSCI Chinese Index is lower than that of the global index and is close to the lower end of its valuation range, and as Chinese companies expand globally, this valuation discount will eventually revert to a premium, forcing investors to quickly shift to China in the medium term, making it difficult to purchase Chinese Stocks without raising the stock price.

Editor/new