Market discussion on "East Rising, West Falling": Alibaba sparks a massive wave of AI investment in China as large amounts of capital flee the US stock market

According to Zhitong Finance APP, as Chinese tech giant Alibaba (09988) announced better-than-expected results and showcased an ambitious "super blueprint for artificial intelligence," the AI investment boom has fully ignited the Chinese stock market, driving the Chinese tech stocks favored by global funds to maintain a strong upward trend this year. This super wave of artificial intelligence is comparable to the "mad bull" market of US tech stocks in 2023. However, since 2023, the US stock market, which has emerged from a super bull market, has fallen into a downturn this year, with Goldman Sachs warning that, under significant capital outflows, the US stock market, which is at its highest historical valuation, is inevitably entering a correction trend.

With the comprehensive rise of the domestic AI startup DeepSeek, leading a new "AI large model computing paradigm" centered on "low cost" and "high efficiency," DeepSeek is beginning to deeply integrate with various industries such as healthcare, finance, and education, as well as AI innovation products/services brought by consumer electronics and other AI application terminals, which is expected to drive the sales and operating profits of China's semiconductor, SaaS software, cloud computing, and even all industries into a new growth paradigm, boosting global investors' bullish sentiment towards Chinese stocks, especially for the giants that significantly benefit from the demand for inference computing power—namely, the cloud giants like Alibaba and Tencent with strong cloud AI computing power systems, whose bullish sentiment has further intensified this week.

Since the emergence of DeepSeek-R1, the logic behind the "seven giants" leading the US stock market, including Nvidia, Microsoft, and Google, has fundamentally changed, with investors beginning to strongly question whether the US tech giants' seemingly fervent AI cash-burning plans are reasonable. Except for Meta, the stock performance of other giants has significantly underperformed the S&P 500 index, becoming the core negative catalyst dragging down the overall rise of the US stock market. The benchmark measuring the overall rise of the "seven giants" has significantly underperformed Chinese tech giants like Alibaba.

DeepSeek continuously reduces the "ineffective consumption" of general computing power through "extreme software engineering, parallel optimization, and precise data screening," concentrating resources on the core modules (attention heads, key operators, RL/distillation fine-tuning, etc.) that can most enhance model performance, demonstrating how to approach or even exceed the performance of mainstream industry large models with limited GPU resources, posing a strong challenge to the traditional "massive cash-burning" model. With an extremely low investment cost of less than $6 million and under the conditions of 2048 H800 chips with performance far below H100 and Blackwell, the DeepSeek team has created an open-source AI model with performance comparable to OpenAI's o1, while the training costs for Anthropic and OpenAI reach as high as $1 billion. DeepSeek's pricing for inference input and output tokens can be described as a "deeply discounted" promotion compared to OpenAI's pricing.DeepSeek requires only $2.19 per million output tokens, while OpenAI's GPT-4 costs as much as $60.**

Overnight U.S. stock market performance showed that the Nasdaq China Golden Dragon Index rose by 1.6%. Driven by strong performance and AI ambitions, Alibaba surged by 8.1%, and its internet data center partner, GDS (GDS.US), rose nearly 13%. After the Hong Kong stock market opened, Alibaba's shares soared over 10%, leading the Hang Seng Tech Index to rise more than 3% at one point, while the Hang Seng Index increased by over 2%. In contrast, on Thursday, the Dow Jones Industrial Average fell by 1.01%, the Nasdaq Composite Index dropped by 0.47%, and the S&P 500 Index declined by 0.43%.

Bank of America noted in its latest global fund manager monthly survey that the logic for buying Chinese stocks (especially tech stocks) is continuously strengthening, possibly enough to attract long-term investors back, and fund managers' views on Chinese stocks may be shifting from "tradable" to "investable"—this would represent a significant shift in investment attitudes and capital flows, as foreign investment institutions typically spend months or even years in long-term observation.

Jeff Weniger, head of equity strategy at WisdomTree Asset Management, stated on social media platform X: “China's 'Ten Tech Giants' have overwhelmed the 'Seven U.S. Tech Giants.' This started six months ago, but few people noticed.”

Morgan Stanley, which has long held a cautious stance on Chinese assets, abandoned its previously pessimistic view on the Chinese stock market this week and expects that the investment boom in Chinese AI triggered by DeepSeek will continue to provide momentum for the market, leading to a more sustainable upward trend in the Chinese stock market (including Hong Kong and A-shares). Morgan Stanley also raised its year-end target for the Hang Seng China Enterprises Index from 6,970 points to 8,600 points, increased the year-end target for the Hang Seng Index from 19,400 points to 24,000 points, and maintained its target for the CSI 300 Index at 4,200 points.

The so-called "ABC strategy"—Anything But China, meaning to avoid Chinese assets, but after the shock of the DeepSeek R1 large model in Silicon Valley and Wall Street, as well as Alibaba's latest earnings announcement, some investors have redefined ABC as: A for AI, B for BABA (i.e., Alibaba), C for China.

DeepSeek ignites a frenzy in Chinese tech stocks, potentially leading the Chinese stock market out of a "long bull" trend

The epoch-making "ultra-low-cost AI large model" launched by DeepSeek has become an unprecedented "bull market catalyst" for global investors to reassess Chinese assets, especially the Chinese stock market (including Hong Kong and A-shares), who were previously concerned about the soaring valuations of U.S. tech stocks. The emergence of DeepSeek has completely ignited global capital—including leveraged hedge funds and traditional asset management giants—around an unprecedented investment frenzy in the Chinese AI sector, and the booming market for Chinese tech stocks is expected to lead both Hong Kong and A-shares into a long-term bull marketAfter DeepSeek released its open-source AI large model that rivals o1, major Chinese internet companies and other tech firms have become emerging threats in the U.S. AI sector. Despite facing restrictions from Western countries on importing advanced chips, the development costs for DeepSeek applications are significantly lower than those of American competitors. This release caused the market value of "AI chip giant" Nvidia to evaporate by over $500 billion in a single day on January 27. Global funds have poured in, driving the total market value of the Chinese stock market (including Hong Kong and A-shares) to expand by $1.3 trillion in the past month.

Alibaba's better-than-expected performance and ambitions for artificial intelligence indicate that the path to efficiency innovation through AI in various industries in China may just be beginning, igniting a wave of AI investment in the Chinese stock market, with foreign investors' bullish sentiment towards Chinese tech stocks continuing to rise.

Alibaba's financial report shows that for the third fiscal quarter of 2025 (ending December 31, 2024), revenue was 280.15 billion yuan, a year-on-year increase of 8%; operating profit was 41.205 billion yuan (approximately $5.645 billion), a year-on-year increase of 83%; and net profit attributable to ordinary shareholders was 48.945 billion yuan (approximately $6.705 billion), a year-on-year increase of 333%.

More importantly, Alibaba CEO Eddie Wu stated at the earnings conference that over the next three years, Alibaba will increase investment in three areas centered around AI: AI infrastructure, foundational model platforms, and AI-native applications, as well as the AI transformation of existing businesses. The investment in cloud and AI infrastructure over the next three years is expected to exceed the total of the past decade, demonstrating Alibaba's confidence in capturing larger-scale profits amid China's unprecedented AI boom.

Goldman Sachs, after experiencing the "DeepSeek shockwave" that severely impacted U.S. tech giants, has shown bullish enthusiasm for the Chinese stock market. The Chinese equity research team at Goldman Sachs expects that the widespread adoption of AI over the next decade could drive overall earnings of Chinese stocks to increase by 2.5% annually. Goldman Sachs has also raised the target points for the MSCI China Index and the CSI 300 Index to 85 points and 4,700 points, respectively, indicating that both indices have approximately 15% and 20% upside potential over the next 12 months. While AI brings more hope to the growth prospects of the Chinese economy, the Goldman Sachs team also pointed out that strong policy stimulus will be an indispensable momentum for the sustained rise of the stock market, overcoming macroeconomic challenges.

The MSCI China Index has entered a "technical bull market," covering core Chinese assets such as Alibaba, Tencent, Kweichow Moutai, and China Yangtze Power, currently hovering around 72 points. The CSI 300 Index is hovering around 3950 points.

One of the world's largest hedge funds, Man Group, recently expressed a very optimistic outlook on the investment prospects of the Chinese stock market. Edward Cole, the head of equity allocation at the group, stated that Chinese stocks are one of the most certain trades this year, with new appreciation driven by innovations in artificial intelligence expected to boost investment recovery. Cole also noted that the Chinese government's stimulus measures and investors moving away from increasingly expensive U.S. tech stocks provide strong support for the Chinese stock market.

From a valuation perspective, the expected price-to-earnings ratio of the Hang Seng Tech Index hovers around 17x, with a price-to-sales ratio of only 1.1x, below its own average level, and significantly lower than the expected price-to-earnings ratio of 28.2x and price-to-sales ratio of 4.5x for the Nasdaq 100 Index.

International investment bank UBS provided a benchmark list of Chinese and U.S. tech stocks in its latest research report to help investors better understand the potential and value of Chinese tech companies. This list quickly became popular across major stock forums in China. In this list, the UBS analysis team benchmarks Cambricon against Nvidia, Xiaomi against Tesla, SMIC against TSMC, Tencent against Meta, and Alibaba against Amazon, which has the highest global market share in cloud computing. UBS emphasized that software stocks in the Chinese stock market will be the core beneficiaries of the "DeepSeek integrating everything" trend, especially in areas such as enterprise workflow automation, knowledge management, and vertical digital solutions.

The UBS analysis team stated that the development of the artificial intelligence industry typically drives a significant increase in the valuations of related stocks. In the past 4G, 5G, and cloud computing eras, related stocks outperformed the overall market by 50% to 100%, and such rebounds usually last for 1 to 2 years. The UBS report pointed out that since the release of the R1 model by DeepSeek, Chinese AI-related stocks have risen about 15%, significantly outperforming the MSCI China Index's 9%. UBS predicts that the market rally related to artificial intelligence in the Chinese stock market may not yet be halfway through, especially for software stocks like Alibaba, which have significant room for valuation increases in the future.

As Alibaba and Tencent showcase "the infrastructure tags of cutting-edge AI large models + powerful cloud AI computing systems + complete AI application software developer platforms," and as these tags scale with the penetration of AI application software into various industries in China, the future market size is expected to rival that of Amazon AWS and Microsoft, potentially triggering an investment boom similar to the influx of global funds into North American cloud computing giants in 2023-2024. In comparison, Alibaba currently has a market value of about $320 billion, while Amazon and Microsoft reach $2.36 trillion and $3.10 trillion, respectively.

Strategist who accurately predicted the summer sell-off in U.S. stocks: U.S. stocks are about to enter a downward trajectory

Goldman Sachs' Prime division pointed out in its latest weekly report that last week, global hedge funds significantly reduced their positions in the U.S. technology, media, and telecommunications (TMT) sector, marking the largest reduction in U.S. tech stocks since July 2024, ranking in the 98th percentile over the past five years. This move signifies another sharp shift in hedge fund investment strategies. Just a week ago, they were aggressively bottom-fishing U.S. tech stocks, making the largest purchases since December 2021.

Chris Weston, head of research at Pepperstone Group in Melbourne, stated that Alibaba's strong earnings "sufficiently justify the recent trend of capital shifting from the overvalued seven tech giants in the U.S. to the Chinese artificial intelligence sector."

Scott Rubner, managing director and global equity market tactical expert at Goldman Sachs, recently warned that as retail and institutional investors' capital momentum began to wane starting Thursday, coupled with profit-taking pressure amid increasingly high valuations, the U.S. stock market may enter a significant correction phase.

Rubner even warned that retail demand in the U.S. stock market and pension fund flows are beginning to fade, with systematic funds potentially selling off $61 billion in U.S. stock assets over the next month.

"The flow of funds has undergone a dramatic change since Monday, and I have entered a downward correction observation mode." Rubner, who accurately predicted last year's summer sell-off in the U.S. stock market, wrote in a report to clients on Thursday.

Despite facing uncertainties regarding tariff policies and the Federal Reserve's interest rate path, the U.S. stock market still reached a historic high on Wednesday. This round of gains was driven by corporate earnings resilience and strong capital flows, but Rubner noted in his latest report that these supporting factors may begin to change significantly starting this week.

The retail demand that has surged into U.S. stocks at a record pace this year is expected to slow significantly before the March tax season. Pension fund flows may also "lose momentum" or even see significant outflows, which Rubner attributes to seasonal market patterns—typically, January and February are the most active periods for asset allocation, while capital inflows often weaken in March.

The positioning of trend-following systematic funds also signals bearishness and profit-taking at high levels. For CTA-type strategy funds that buy and sell stocks based on market direction, if the market accelerates downward, they may sell approximately $61 billion in U.S. stocks over the next month; even if the market strengthens, Rubner expects their strategy group to buy only about $10 billion.

Options market positions exacerbate the volatility risk in the U.S. stock market. According to Goldman Sachs, market makers currently hold as much as $9.8 billion in long gamma positions on the S&P 500 index, which can provide a buffer during market declines (as market makers need to buy low to hedge) However, the index trading team of the institution estimates that 50% of the gamma longs will expire on Friday, significantly expanding the downside volatility space in the market next week