CITIC SEC: Investment Risks and Opportunities in 2024 Based on the Performance of US and Chinese Technology Stocks in the Past 10 Years

Zhitong App learned that CITIC SEC has released a research report stating that the performance of US and Chinese technology stocks driven by the AI concept will be significantly stronger than the domestic market in 2023, with US technology giants leading the global market. Since the beginning of 2024, the stock prices of US and Chinese technology stocks have significantly corrected. Reviewing the trends of US and Chinese technology stocks over the past decade, as well as their valuation and profit contributions, it is believed that the main factors determining the trend of US technology stocks in 2024 may be: whether AI can truly transform from a valuation expansion factor into a driving force for performance release, as well as macro factors such as the Federal Reserve's balance sheet reduction process and interest rate reduction pace. In the Chinese market, it is recommended to focus on companies related to AI computing power and cloud computing.

▍Key points from CITIC SEC:

Generative AI will drive a strong year for global technology stocks in 2023, but there has been a significant correction since the beginning of 2024.

In 2023, major technology companies around the world have fully invested in the field of generative AI. OpenAI, Microsoft, Meta, Google, and others have successively launched products or models such as GPT-4, New-Bing, Llama-2, and Gemini, and have received positive feedback from the capital market. The stock prices of leading US technology companies have outperformed the global market, with the US 7 Giants Index tracking the top 7 large technology companies in the US rising by 107%, and the total market value surpassing the high point of 2021. Among them, NVIDIA, as a leading AI chip company, rose by 240% throughout the year. In other major markets around the world, technology stock indices have also performed better than the market average.

In the Chinese market, companies involved in the AI chip industry chain have performed well: Unisplendour/Industrial Fulian, as representative companies in the domestic AI industry chain, rose by 299.0%/62.4% throughout 2023, and Haiguang Information, as a representative target of domestic computing power, rose by 68.9%, both significantly outperforming the sector index. In the first two weeks of 2024, global technology stocks have experienced varying degrees of decline. After experiencing a continuous decline for 5 trading days, the Nasdaq Composite Index rebounded. This is the longest continuous decline of the Nasdaq since October 2022, reflecting the market's concern about whether the future profit level of the Nasdaq can support its high valuation. The Chinese technology sector has been affected by market sentiment, and the Hang Seng Technology Index and the ChiNext 50 Index have both fallen by a similar magnitude since the beginning of 2024 as the full-year decline in 2023.

2023 was one of the most significant years of growth for global technology stocks in the past decade, with the rebound after a significant decline in 2022 and the expansion of valuation in 2023 being the main driving forces.

Over the past decade, US technology stocks have shown considerable resilience in their growth. Except for the retreat in 2022 caused by the Federal Reserve's significantly higher-than-expected interest rate hikes, major US technology indices have shown a certain momentum of continued growth in the following year after a significant rise. In each 3-4 year small cycle over the past decade, the rise of the Nasdaq index has been driven by valuation first, followed by a period of 1-2 years of performance realization. During the period of performance realization, valuation has shown slight fluctuations or declines in support of the overall index, and the overall index has continued to rise supported by the expansion of enterprise EPS. In 2022, the US Federal Reserve significantly raised interest rates, causing a sharp decline in the overall US market and the technology sector as equity market valuations plummeted.

In 2023, the US market interest rates remained high, driving the technology sector's rise through the influx of US dollars and the investment wave triggered by AI. However, from a fundamental perspective, the performance of NASDAQ-listed companies had a negative contribution to stock prices, and the rise in stock prices was mainly due to the valuation expansion caused by the AI concept. Comparing 2022 and 2023, the EPS growth rate of NASDAQ was 4%/-6% respectively (note: the EPS growth rate for the first three quarters of 2023), while the valuation level increased by -37%/33%. In the past twenty years, except for 2020 when the Federal Reserve significantly expanded its balance sheet, leading to an overall increase in equity market valuations, there have been few instances of consecutive years of significant valuation expansion in NASDAQ.

Looking ahead to 2024, the continuous expansion of valuations for US tech stocks faces certain pressures. Whether AI can bring substantial revenue and profit contributions to technology companies will be a key factor in determining whether US tech stocks can continue to strengthen. There is optimism about the maturity of AI applications and the landing of edge AI terminal hardware. If AI applications can bring performance contributions similar to those of the mobile internet, US tech stocks are expected to experience a sustained period of strength similar to 2013-2015. If the profitability of AI applications cannot support the return of NASDAQ's EPS growth rate to a high level, US tech stocks will face performance pressures from fundamentals.

The most important investment opportunities for Chinese tech companies in 2024 are AI computing power and cloud computing. In the long term, China is expected to grow more tech companies with large market values.

The training and inference of AI large models have a strong demand for computing power, and with the continuous maturity of downstream AI applications, the global scale of computing power is expected to continue to grow rapidly. On the other hand, the US restrictions on chips to China are becoming stricter, forcing Chinese computing chip manufacturers to seek alternative solutions. Although there are gaps between domestic chip manufacturers and overseas leaders and their industrial chains in terms of technology and ecosystem, positive progress has been made in various aspects such as products, chip manufacturing, and customer adoption. At the same time, with the development needs of improving the core ecosystem of AI server autonomy and control, domestic CPUs, supporting components, and more are expected to usher in development opportunities.

From a long-term perspective, since 2011, with the continuous upgrading of China's industries and the rise of mobile internet, the proportion of information technology companies in the total market value of A-shares has rapidly increased from 4% to 16%. In comparison, information technology companies account for 34% of the total market value of the S&P 500 index. It is believed that China's technology industry still has tremendous growth potential. Looking ahead, with the rapid iteration of the AI industry, continuous breakthroughs in technological innovation by Chinese tech companies, and deep participation in the global industrial chain, there is optimism about the birth of more tech companies with large market values in the Chinese market.

Investment Strategy:

The artificial intelligence industry is in a high-speed development stage, with the continuous rapid iteration of basic large-scale model capabilities and their applications. In 2024, generative artificial intelligence will still be the main focus of technology industry investment. OpenAI leads the global AI industry, and its technological development and commercialization progress are worth continuous attention. Google's Gemini is following closely, and Facebook's Llama2 large-scale model open source has attracted attention. In the global market, there are investment opportunities in the field of AI computing power, domestic computing power solutions, and other related areas. In addition, cloud computing, data elements, and AI application sectors are also worth paying attention to. It is recommended to continue to focus on US technology companies related to AI.

Risk factors:

Risks include the development of core AI technologies falling short of expectations, continuous tightening of regulatory policies in the technology sector, regulatory risks related to private data, global macroeconomic recovery falling short of expectations, potential ethical, moral, and user privacy risks of AI, risks of corporate data leakage and information security, risks of the global cloud computing market not meeting expectations, and risks of intensified industry competition, among others.