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Goldman Sachs has increased its target for the MSCI China, citing the impact of the newly launched Chinese artificial intelligence (AI) model DeepSeek-R1 and other competitive, cost-effective AI technologies from China.
The emergence of DeepSeek has led to a significant rally in Chinese technology stocks and have heightened investor optimism regarding the growth and economic benefits of AI in the region. Over the past month, the Hang Seng TECH and MSCI China Index have experienced rallies of 27% and 19%, respectively.
Since the introduction of ChatGPT in November 2022, U.S. equities have seen a substantial 50% increase, adding approximately $13 trillion to the market capitalization. Goldman Sachs analysts suggest that AI could be a significant contributor to corporate profits, equity multiples, and portfolio flows.
"We estimate widespread AI adoption could boost Chinese EPS by 2.5%/year over the next decade. Improving growth prospects and perhaps a confidence boost could also raise the fair value of China equity by 15-20%, and potentially usher in over US$200bn of portfolio inflows," Kinger Lau, Chief China Equity Strategist and Managing Director at Goldman Sachs, wrote in a note to clients.
As a result, Goldman Sachs has revised its targets for the MSCI China and CSI300 indices to 85 and 4,700, respectively, indicating potential 12-month upsides of 16% and 19%.
While AI holds promise for China's growth trajectory, robust policy stimulus is still necessary to tackle the country's macroeconomic challenges and to support sustainable equity gains, Lau wrote.
Goldman Sachs has organized China's listed companies into two groups—AI Tech and Non-Tech—and further into six thematic cohorts to analyze the AI ecosystem's unique characteristics. The cohorts include Semiconductor (Semi), Power & Infrastructure, Data & Cloud, Software (ETR:SOWGn) & Application, Revenue Growers, and Productivity Gainers.
For investors interested in the Chinese AI sector, the Hang Seng TECH Index and CSI 1000 are highlighted as benchmarks with the highest Tech/AI representation.
Goldman Sachs favors the Data & Cloud and Software & Application sectors, anticipating that as the AI capital expenditure cycle moderates, use-case creation and monetization will accelerate.