Fast reading
- The Hang Seng Tech Index has risen more than 25% since mid-January.
- US inflation rose unexpectedly to 3% in January on the back of rising energy and food prices.
Chinese equities have rallied over the past month with the Hang Seng Tech Index, which tracks the 30 largest Hong-Kong based tech companies, surging more than 25% since mid-January 1 following the release of DeepSeek’s R1 model, a generative AI model that rivals OpenAI’s ChatGPT.
While investing in China comes with its challenges, the attractive valuations in the region present a compelling opportunity for those willing to navigate the risks, says Jonathan Pines, Head of Asia ex-Japan at Federated Hermes.
“Most investors are aware of the risks [in China] – they range from potential tariffs to the problems in the property market to weak consumer sentiment. But for us, investing has always been about price versus value,” he says, adding that valuations are “extraordinarily” attractive even in the context of those risks.
“If all the risks play out in the worst possible way, it won’t be great for an investment in China. But if you probability weight those risks, we continue to find Chinese stocks attractive because you’re being paid to take them,” he explains.
Despite the headwinds in the region, they are unlikely to persist in the long term, says James Cook, Head of Investment Directors & Specialists at Federated Hermes Limited, who explains why he seeks to find the balance between price and quality in these companies.
“Chinese stocks continue to trade at near-record low valuations; the Hang Seng Index trades on 9.1x estimate 12 months forward price earnings of 9.1x, relative the MSCI AC Asia ex-Japan index on 12.6x, India’s Sensex index on 19.2 and Taiwan’s Taiex index on 16.4x,” he says.
Figure 1: Hang Seng Tech Index on a tear
Elsewhere in emerging markets, Indian Prime Minister Narendra Modi met with US President Donald Trump this week, the fourth White House visit by a foreign leader since the start of the Trump’s second term in office.
Modi’s trip is unlikely to have a material impact on the Indian equity markets, “unless it brings reasonable certainty that the Trump administration will not target the country for its lop-sided import tariffs,” says Kunjal Gala, Head of Global Emerging Markets, Federated Hermes Limited,
“Several factors are impacting India’s equity markets, including a slowdown in consumption, muted private sector capital investment, lack of meaningful structural reforms, and slower growth in infrastructure commitment by the government compared to previous years. These factors, coupled with Indian equities high relative valuation compared to other emerging markets, means there is a very low margin of safety [for investors],” Gala says.
In other news...
US inflation rose unexpectedly to 3% in January2, an uptick from December’s 2.9% rate, and its highest rate in six months, according to data released on Wednesday. The increase, which was driven by rising energy and food costs, follows of the US Federal Reserve’s (the Fed) January meeting, where policymakers opted to leave rates unchanged.
“This week’s US CPI print will do little to calm the tariff-ied rates markets. Inflation has clearly paused its decline, and recent tariff announcements have the potential to increase inflation in the coming months,” says Damian McIntyre, Portfolio Manager – Multi-Asset, at Federated Hermes. “Thankfully, the US jobs market is strong, earnings are growing, and the consumer is experiencing real wage growth, all things that should help markets weather a sustained rate pause.”
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