Minsheng Securities: Moving out of "U.S. Dominance" and Focusing on Changes in China

According to the Zhitong Finance APP, Minsheng Securities released a research report stating that the two core drivers of the recent rise in U.S. stocks, AI and the Trump trade, have both reached a turning point. As the U.S. is no longer "exceptional," the "perfect narrative" of U.S. stocks will also come to an end. At this time, for A-shares, it has instead ushered in a process of gradually shifting from being dominated to taking the lead. As the risks of trade uncertainty shift from being solely borne by China to being shared globally, the CSI 300, which has consistently underperformed globally, may actually show greater resilience, and its discount compared to overseas markets may converge. In fact, the current fundamentals in China also show characteristics of a resilient bottom stabilizing, and there are some positive factors to look forward to in the future. Investors need to gradually move away from the "U.S.-dominated" mindset and focus on changes in China.

The main points of Minsheng Securities are as follows:

When the U.S. is no longer "exceptional," the "perfect narrative" of U.S. stocks will also come to an end.

The rise of U.S. stocks in the past has been driven by two core factors. On one hand, it stemmed from the frequent global geopolitical conflicts under the previous Biden administration, which attracted a large amount of safe-haven funds to U.S. stocks. The market anticipated that the policies promised by the Trump administration, such as America First, reducing inflation and interest rates, and tax cuts, would be beneficial to the earnings fundamentals. On the other hand, the current wave of AI industry led by the U.S. has allowed large tech stocks in the U.S. market to enjoy valuation premiums due to their high scarcity, unique technology, and monopolistic characteristics, which in turn reflected the performance of global tech stocks.

These two factors have recently begun to show turning points: For the former, the contradictions between Trump's policies are becoming evident, and foreign countries are responding relatively firmly to Trump's tariff policies, forcing the Trump administration to consider more about exports, inflation, and political gamesmanship in future tariff actions. As the risk of stagflation in the U.S. rises, the uncertainty of the switch from the denominator to the numerator in U.S. stocks increases; at the same time, the Federal Reserve is beginning to show greater independence under inflation risks.

For the latter, China's large model DeepSeek has achieved performance comparable to OpenAI with lower training costs, shaking the expectation that maintaining the training and leading advantages of large models requires massive capital expenditures and computing power investments. Once low-cost, high-performance open-source large models become widespread in the future, the monopolistic narrative and business logic of the AI industry chain dominated by U.S. stocks will face challenges, and under AI equality, their valuation premiums will also converge. The process of financialization in the U.S. will also reach a viewpoint, as the outperformance of financial assets represented by U.S. stocks over physical assets is nearing its end since 2023.

A-shares: From being dominated to gradually taking the lead.

The wave of AI industry in U.S. stocks has two core reflections on A-shares: the mapping of industrial chain division and the mapping of overseas entities in the self-controlled chain. We find that the price trends of the core leading stocks synthesized equally from these two mappings are comparable to Nvidia, with similar increases; the relative market PS valuation premium of AI-related sectors is second only to mobile internet, surpassing any other industrial wave in A-share history. When the narrative of sector scarcity is broken, considering that China's AI-related assets are not undervalued, there is no room for revaluation, and they may instead be affected by the adjustment of global AI assets However, for the overall A-shares, especially for the heavyweight stocks represented by the CSI 300, they have long been suppressed by the tense Sino-U.S. trade relations. As Trump's tariff policy shifts the uncertain risks of global trade from being solely borne by China to being shared globally, the CSI 300, which has underperformed globally over the past 2-3 years, may actually show more resilience, and the discount compared to overseas markets may converge.

At the same time, during the past Biden administration, a trade "encirclement" was formed against China in collaboration with allies, and the relevant allied countries maintained relatively consistent import and export policies with the U.S. However, the current Trump administration's tariff policy has loosened these alliances, bringing new opportunities for trade relations between China and non-U.S. countries. With the manufacturing PMI of Europe’s UK, France, and Germany generally rebounding in January 2025, some opportunities for non-U.S. exports may also emerge.

Currently, China's fundamentals show characteristics of a resilient bottoming out, and there are some positive factors to look forward to in the future.

The emergence of DeepSeek indicates that the U.S. suppression of China's AI is not unbreakable. Of course, this does not mean that the gap at the company level can be closed immediately. More importantly, when AI is no longer scarce, changes outside of artificial intelligence may begin to become significant.

It is worth mentioning that certain sectors in China are also showing resilient bottoming characteristics in terms of fundamentals, such as the production and sales of automobiles, home appliances, and construction machinery, which have consistently demonstrated resilience. The policy of replacing old with new has driven retail sales to remain flat for three consecutive months from October to December 2024, and the latest travel and movie-watching data during the Snake Year Spring Festival holiday have also set new highs for the same period, indicating that domestic consumption resilience is still present.

At the same time, the latest earnings forecasts also show that leading manufacturers in certain sub-segments are demonstrating advantages in expanding into foreign markets and clearing production capacity. Looking ahead, there are also some directions to expect in domestic fundamentals: the post-holiday return-to-work wave, further enrichment of the "two new and two heavy" policies, and potential overseas investment activities exceeding expectations. New market focuses may emerge: China's pro-cyclical manufacturing and physical workload cycle assets may perform.

Gradually stepping out of "U.S. dominance" and focusing on changes in China.

The two major logics of U.S. financialization are reaching a turning point. For A-shares, it is still necessary to accept the impact of "Trump volatility" on global risk assets, but its relative resilience will be more evident. At the same time, the resilient characteristics of China's fundamentals at the bottom need to be priced in, and heavyweight stocks represented by the CSI 300 may be revalued. Recommendations: 1. Global manufacturing activity is marginally recovering, and physical assets driven by financial and security attributes are expected to welcome favorable moments (gold, oil, copper, aluminum, coal); 2. Undervalued dividend assets in banks; 3. If domestic economic activity rebounds as expected due to domestic "two new and two heavy" policies and overseas investment activities, some previously undervalued pro-cyclical sectors in China will also perform: steel (special materials), equipment (transportation equipment, construction machinery), agricultural chemicals, chemical products; 4. Consumer sectors: white goods, tourism. Risk Warning: Domestic inventory cycle fluctuates beyond expectations; adjustment period for certain industry patterns exceeds expectations