So long Magnificent Seven. Hello, Terrific 10.
Nvidia, Tesla, and the rest of Big Tech are having a rough go of it, while China's Terrific 10 -- Alibaba, Tencent, Meituan, Xiaomi, JD.com, NetEase, Baidu, BYD, Geely, and SMIC -- are not. That raises the question: Are the Mag Seven yesterday's news and is it time to focus on their Chinese counterparts instead?
The answer, according to YT Boon, Neuberger Berman's head of thematic for Asia, is a resounding yes. For starters, the emergence of cheaper artificial intelligence technology developed by Chinese company DeepSeek may have kick-started a new wave of investment in AI in China -- and that should benefit leading Chinese companies. "With DeepSeek, China may have their OpenAI moment," he says, referring to the ChatGPT developer that launched the mania for U.S. AI stocks like Nvidia.
Boon argues that the rise of DeepSeek will lead to a significant change in how China's government treats its big technology firms following a crackdown and increased regulations starting in 2020. "Beijing sees a way to get out of a difficult economic situation," he says. "They need the tech sector to invest. That's a massive shift."
That means that the renaissance for Chinese techs may have only just begun despite a massive rally this year. The KraneShares CSI China Internet exchange-traded fund, which owns many of the stocks in the Terrific Ten, is up more than 20% this year while the Roundhill Magnificent Seven ETF has slumped 12%.
Despite this outperformance, many of the leading Chinese growth stocks still look fairly cheap. Search engine and AI leader Baidu is trading at just 10 times earnings estimates for this year, compared to a price-to-earnings ratio of 19 for Google owner Alphabet, the cheapest of the Mag 7. Alibaba's P/E is only 15 while Amazon trades at 31.5 times. WeChat owner Tencent trades for about 18 times, while Facebook and Instagram parent Meta Platforms is valued at 24 times. And electric car maker BYD sports a multiple of 20 -- well below Tesla's P/E of nearly 100. "Valuations for the whole group are still at low levels compared to their U.S. peers," Boon says.
Rick Pitcairn, chief global strategist at Pitcairn, said he also thinks there's more room to run for top Chinese stocks due to their more attractive prices. "I'm still a little wary of big, high value tech," he says. "More money could come out of the Magnificent Seven.
Boon said he isn't concerned about a potential trade war between the U.S. and China either since many of the top Chinese techs rely more on Chinese consumers than exports to America and other nations. He likes Alibaba and BYD, as well as Xiaomi, which he describes as a mix of Apple and Tesla since it makes phones and autonomous electric cars. "There is still a meaningful runway for growth," he said, referring to Xiaomi. "They still have an advantage in their home market, which is a very large market."
To that end, analysts are forecasting a nearly 25% increase in earnings for Xiaomi over the next few years, according to estimates from FactSet. But Wall Street is predicting just 7% annual earnings growth for Apple.
Cheaper stock? Faster growth? That sounds like a winner in our book.
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