China Thematic Will Outperform, JPMorgan's Liu Says

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Bloomberg Mercury Feb 7, 2025 16:05 · 25.8k Views

Wendy Liu, chief China equity strategist at JPMorgan, says she prefers the AI story because of structural growth and innovations. According to Liu, "thematic will outperform because there's so much noise" around US-China tensions.

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Transcript

00:00 Let's talk about AI first.
00:02 How much of this is truly a fundamental sort of offset to some of the tariff weakness that we're seeing?
00:09 I'm thinking not just the necessary of AI, but all of the sort of AI adjacent industries
00:13 and sectors.
00:14 Yeah, some of the AI
00:17 adjacent sectors are also more in scope for potential sanctions.
00:21 And I think at this point, people are just quite excited
00:26 about the development that there are more companies and sectors that could be invested beyond computing.
00:33 And you're seeing these innovations
00:36 and vertical applications in humanoid robots.
00:39 And according to our analysts that this will help biotech in terms of diagnosis and drug discovery.
00:46 So I think you're going to see a broader
00:49 range of companies in the edge
00:52 area, semiconductor, electronics and then also
00:56 device.
00:58 I think this is sort of cheap valuation visa be you know what's available elsewhere and then a new source of growth
01:07 yeah.
01:07 Do we know enough about the
01:08 AI story to figure out which specific sectors or group of names might might benefit?
01:13 Because
01:14 people seem to be buying 1st and asking questions later.
01:17 Yeah,
01:18 I think it was computing and
01:20 you know, the computing sort of ecosystem like cooling, optical components,
01:26 because the initial drive is really about building infra.
01:29 And I think building infra that continues because you have apps coming here making it easier for people to use
01:37 the,
01:37 the like of, you know, better.
01:39 LMS are really the data infrastructure that enable broader adoption.
01:44 And so on top of that, you'll have
01:47 retail, you have enterprises increasing usage.
01:50 So that's good for cloud, that's good for software application, that's good for edge replacement Cycles are probably going to get better and you'll have more part of the network,
02:01 the Internet
02:02 of Things,
02:04 network of things, having to deploy more
02:07 semiconductors
02:08 and then vertical
02:10 category killers.
02:11 So just like the Internet broadband
02:14 over time that move into mobile Internet, there's just a lot more companies to it for us to invest in.
02:21 Wendy, there's there's maybe an argument to be made partly from what we've seen this week with the uneven trading and sort of whiplash around, for example, the USPS suspension, the ban.
02:30 Will they won't they
02:32 some of the AI news that is still coming through offsetting the tariffs.
02:35 Are they going to come?
02:36 Are they not the
02:37 back and forth on Canada.
02:40 I want to ask about whether or not it's still possible to sort of trade indices.
02:44 Do you actually have to be a stock picker
02:47 to do well in 2025?
02:50 I would agree.
02:51 I think Cmatic will outperform because there's so much noise.
02:56 When the US election result came out,
02:59 I think the market had a
03:01 escalation phase with regard to trade tensions that ended on January
03:06 13th and people had a relief rally.
03:09 Now I think the market is trying to assess is this a re escalation which a lot of people think it is?
03:15 Is this a standoff?
03:17 Standoff with mean consolidation, Re escalation is going to be a correction.
03:21 But then the safer ground appears to be AI where there is
03:26 structural growth.
03:27 And even within thematics, do you have to shift your strategy?
03:30 I'm thinking about, for example, the alumina was added to the entities that that took some by surprise.
03:35 It wasn't like PVF, which had been already flagged as being investigated.
03:39 There are names that are being caught up somewhat unexpectedly even when the sectors or the themes themselves are doing quite well.
03:47 I can't comment on single stocks,
03:49 but I go back to your earlier point.
03:52 It requires a little bit more fundamental study into the single stocks to understand
03:58 where the risks are.
04:00 And I think to the degree that a lot of the stocks have been oversold, we do see some interest coming back to the investors and they say it's over
04:09 priced in already.
04:10 But then we also see caution because,
04:13 you know,
04:14 two point O, we learn from one point O that there could be a lot of surprises.
04:19 And then China is different from Mexico
04:23 and Canada.
04:25 The deal will be more complex.
04:28 So it's going to take more time.
04:30 So we do think this, you know,
04:32 an even phase will last at least into March where we get a little bit more visibility from the MPC.
04:40 Yeah, yeah.
04:40 And
04:41 I guess your point, the the, the fundamental question, the intersection between tariffs and
04:45 thematics is really what the earnings exposure is.
04:48 So
04:49 what scenarios have you guys came out?
04:51 So for every unit of growth that gets taken away because of the
04:54 tariff uncertainty,
04:56 what happens?
04:57 What are the benchmarks that are most exposed from an earnings perspective?
05:00 Yeah,
05:00 we did some sensitivity study.
05:02 So you know
05:04 1.5% of the GDP get hit due to tariffs that we're going to see about low single digit impact on MSCI, China and CSI 300
05:14 earnings in 2025.
05:16 It's not a high number, it's you know 1 to 2%
05:20 because these two indices on a first order of impact
05:25 basis
05:26 don't have a huge exposure to export MSCI China's about 4% overseas revenue, CSI 314,
05:35 general economy 19,
05:38 but small MIT caps, they have higher exposure,
05:41 fifteen, 1618% depending on the index.
05:44 So they would be hit a little bit harder, but
05:47 in these kind of markets, it's C matics
05:50 among small MIT caps.