The AI concept drives the performance of Chinese and US technology stocks to significantly outperform the domestic market in 2023, with US tech giants leading the world.
The Zhitong Finance App learned that CITIC Securities released a research report saying that the AI concept will drive the performance of Chinese and US technology stocks to be significantly stronger than the domestic market in 2023, with US tech giants leading the world. Since the beginning of 2024, there has been a significant correction in Chinese and US technology stock prices. Reviewing the trend of Chinese and US technology stocks over the past ten years, and judging the main factors that determine the trend of US technology stocks in 2024 may be: whether AI can actually transform the driving force released by performance from valuation expansion factors, as well as macroeconomic factors such as the Fed's downsizing process and the pace of interest rate cuts. In the Chinese market, it is recommended to focus on AI computing power and cloud computing-related companies.
▍ The main views of CITIC Securities are as follows:
Generative artificial intelligence drove 2023 to become a major global technology stock year, but there has been a significant pullback since the beginning of 2024.
In 2023, major technology companies around the world fully invested in the field of generative AI. OpenAI, Microsoft, Meta, Google, etc. successively launched products or models such as GPT-4, New-Bing, Llama-2, and Gemini, and received positive feedback from the capital market. Leading US technology stocks led the global market in gains, tracking the top 7 US tech companies, rising 107%, and the total market capitalization once again surpassed the 2021 high. Among them, Nvidia, as the leading AI chip company, rose 240% throughout the year. In other major global markets, various technology stock indices also recorded better performance than the market average.
In the Chinese market, companies participating in the AI chip industry chain showed outstanding performance: Zhongji Xuchuang/Industrial Fulian, as the representative company of the domestic AI industry chain, rose 299.0%/62.4% for the full year of 2023, and Haiguang Information, as the representative target of domestic computing power, rose 68.9%, all significantly outperforming the sector index. Global technology stocks declined to varying degrees in the first two weeks of 2024. The Nasdaq Composite Index rebounded after 5 consecutive trading days of decline. This is the longest continuous decline since October 2022. This reflects market concerns about whether the future profit level of the NASDAQ can support high valuations. China's technology sector is affected by market sentiment. The declines of the Hang Seng Technology Index and the Science Innovation 50 Index since 2024 are close to the full-year decline of 2023.
2023 was one of the most significant increases in global technology stocks in the past ten years. The return after a significant decline in 2022 and valuation expansion in 2023 were the main driving forces.
Over the past decade, the growth of US tech stocks has been quite resilient. In addition to the pullback in 2022 due to the Federal Reserve's sharp interest rate hike that exceeded market expectations, major US technology indices showed some momentum to continue to rise the year after their sharp rise. Over the past ten years, in every short cycle of 3-4 years, the rise in the NASDAQ index was first driven by valuation, then entered a 1-2 year performance delivery period. During the performance realization period, valuation support for the index as a whole showed a slight fluctuation or decline, and the expansion of corporate EPS supported the overall index to continue to rise. The Federal Reserve raised interest rates sharply in 2022, and the decline in equity market valuations triggered a sharp decline in the overall US market and technology sector.
In 2023, interest rates in the US market remained high, and the technology sector rose, driven by the return of the US dollar and the wave of investment triggered by AI. However, from a fundamental point of view, the performance of NASDAQ companies is a negative contribution to stock prices, and the rise in stock prices is mainly due to valuation expansion caused by the AI concept. Compared to 2022 and 2023, the NASDAQ EPS growth rate was 4%/-6%, respectively (note: 2023 was the EPS increase for the first three quarters), while the valuation level increased by -37%/33%. In the past 20 years, with the exception of the increase in the overall valuation of the equity market in 2020 due to the sharp expansion of the Federal Reserve's statements, there have been few cases where the NASDAQ valuation has expanded drastically for two consecutive years.
Looking ahead to 2024, the continued expansion of US technology stock valuations is under some pressure. Whether AI can bring substantial revenue and profit contributions to technology companies is expected to be a core factor in determining whether US technology stocks can continue to strengthen. I am optimistic about the maturity of AI in the application layer and the implementation of edge side AI terminal hardware. If the application of AI can contribute similar to mobile internet-level performance for technology companies, US technology stocks are expected to continue to strengthen in 2013-2015. If AI fails to support the return of the NASDAQ EPS growth rate to a high level at the application level, US technology stocks will face performance pressure from fundamentals.
The most important investment opportunities for Chinese technology companies in 2024 are AI computing power and cloud computing. Over the long term, China is expected to grow more technology companies with large market capitalization.
There is a strong demand for computational power for AI large-scale model training and reasoning. As AI downstream product applications continue to mature, it is expected that the scale of global computing power will continue to grow rapidly. On the other hand, US restrictions on Chinese chips are getting stricter, and Chinese computing power chips are being forced to seek alternatives. Although there is a technical and ecological gap between domestic chip manufacturers and overseas leaders and their industrial chains, positive progress has been made in various aspects such as product, chip manufacturing, and customer introduction. At the same time, under the development needs of improving the autonomous and controllable core ecosystem of AI servers, domestic CPUs and supporting components are also expected to usher in development opportunities.
Looking at the long-term cycle, since 2011, along with the continuous upgrading of China's industry and the rise of mobile internet, the share of information technology companies in the total market value of A-shares has rapidly risen from 4% to 16%; compared with information technology companies accounting for 34% of the total market value of the S&P 500 index, I believe there is still huge room for growth in the Chinese technology industry. Looking forward to the future, with the rapid iteration of the AI industry, continuous breakthroughs in technological innovation by Chinese technology companies, and deep participation in the global industrial chain, I am optimistic that the Chinese market will nurture more technology companies with large market capitalization.
Investment Strategy:
The artificial intelligence industry is in a stage of rapid development, and basic large-scale model capabilities and their applications continue to be rapidly iterated. Generative artificial intelligence will continue to be the main line of investment in the technology industry in 2024. OpenAI is leading the global AI industry, and trends in technology development and commercialization process deserve continued attention. Google Gemini continues to follow suit, and Facebook's Llama 2 major models are open source receiving attention. There are investment opportunities in the global market, investment opportunities formed in the field of AI computing power, and domestic computing power solutions. In addition, cloud computing, data elements, and AI applications are also worth paying attention to. It is recommended to continue to focus on AI-related US technology companies.
Risk Factors:
The development of AI core technology falls short of expectations; risks of continued tightening of policy regulations in the field of technology; risks of policy supervision related to private data; risks of global macroeconomic recovery falling short of expectations; potential ethical, moral, and user privacy risks of AI; risks of corporate data breaches and information security; risks falling short of expectations in the global cloud computing market; and industry competition continues to increase risks, etc.