Surge of 56.91%! A Major Market Shift

In the world of finance and investment, change often emerges from the desolation of stagnationWe find ourselves at a pivotal moment in the capital markets, as the exuberance that followed the rapidly changing market conditions seems to be evolving once moreThe emotional climate of the market is showing signs of recovery, hinting that a fresh wave of positive trends is on the horizon.

During the recent Spring Festival in the Year of the Snake, a notable event called DeepSeek surged in popularity, revealing significant shifts in the narratives surrounding artificial intelligence (AI) and the competition between the United States and ChinaThe traditional narrative of the U.S. holding a distinct leadership position in AI technologies based on chip and computational power began to falter, suggesting that the gap is narrowing, and even positions could be reversed as a resultThis has led to an inevitable narrowing of valuations between the AI industry chain in the U.S. stock market and that of China's A-share market.

Between January 24 and February 10 of this year, we observed impressive upward trends in tech assets on both A-shares and Hong Kong stocksMajor indices, such as the Hang Seng Tech Index (+17.08%), the Hang Seng Index (+9.25%), and others like the ChiNext Index (+4.33%), showed promising performancesSector-wise, the Hang Seng Information Technology (+18.42%) and Hang Seng Consumer Discretionary (+14.25%) sectors performed strongly, paralleling notable gains in A-share segments such as Computers (+20.57%) and Media (+13.68%). Most strikingly, the Wangda DeepSeek Index alone achieved a staggering 56.91% increase.

This unfolding narrative can be interpreted through the lens of market behavior—as funds increasingly divest from defensive dividend stocks and heavyweight leaders, they are redirecting investments towards growth-oriented sectors, particularly technology and smaller market caps

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While large-cap indices have generally underperformed, a palpable increase in market risk appetite is evident as returns from the tech sector indicate the early stages of a tech boom.

The implications of DeepSeek's emergence are clear; investors are beginning to reassess their valuations regarding the AI supply chains in the U.S. and ChinaThe reduced technology gap suggests that with aligning valuations, there is substantial room for growth in A-share AI sectorsThis trajectory of the "tech bull" market in China appears sustainable, indicating promising timeframes and potential for expansion.

The perception around DeepSeek's potential in transforming market consensus has faced skepticismHowever, it is essential to view DeepSeek as merely a catalystThe groundwork laid over recent years in critical technology fields within China is a culmination of gradual progressThe leap from quantitative change to qualitative change hinges on the right triggers, and there is a good probability that DeepSeek may prove just that.

Interestingly, we find striking contrasts in the performance trajectories of U.S. and A-share marketsHistorically strong performances in U.S. stocks have led to speculative bubbles, while persistent adjustments in the A-share market have resulted in a perceived decrease in valueA significant factor in this discrepancy is tied to the overarching narrative surrounding the fourth industrial revolution caused by AI advancements.

Within this narrative framework, several critical points emerge: (1) Technology equates to national prosperity, and the control of technological advancements directly correlates to a nation’s fortune; (2) AI stands as the centerpiece of this technological revolution and thus becomes critical to the competition among major powers; (3) The foundations of AI rest on data, algorithms, and computational power, with the U.S. previously holding a dominant position, particularly with innovations like ChatGPT, backed by significant technical barriers in chip manufacturing and processing power; (4) Consequently, global capital has consistently favored the U.S. stock market, seeing valuations and market caps for major tech firms—namely the "Big Seven" of the S&P 500—continuing to rise, creating a positive feedback loop that draws in more investment, while simultaneously, overseas allocations to Chinese assets have diminished, propagating diverging trends between the two markets.

However, the rise of DeepSeek disrupts this clearly established narrative

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By demonstrating that it can deliver superior results at a fraction of the operational costs, traditional barriers based on computational power are challenged, undermining the longstanding expectation of continuous American superiority in AIIf the assumptions surrounding these competitive advantages falter, the corresponding investment flow and capital structures will also require recalibration.

In this context, the dynamics of AI competition shift from a U.S.-dominated landscape to one where both the United States and China are competing on a more level playing fieldValuations and market caps of leading tech companies in both countries would gradually convergeAs the narratives surrounding the global AI revolution remain intact, it becomes unlikely to witness a substantial drop in U.S. tech valuations across the board; moreover, for the valuation gap to close, it becomes essential to uplift the valuations of Chinese tech leaders accordingly.

Narratives hold substantial power over investor psychology and expectations; shifts in these narratives can lead to corresponding shifts in consensus and behaviors in the marketUntil proven otherwise, prevailing narratives will continue to shape market sentiment.

Economist Robert Shiller emphasizes that economic fluctuations often stem from oversimplified and easily propagated narrativesIn a historical context, these narratives guide the decisions individuals make, thereby influencing broader economic outcomes.

For instance, during periods when a societal narrative emphasizes frugality, individuals often feel embarrassed by ostentatious consumption, resulting in reduced overall spending