CHINA: Valuations and AI driving family office comeback to China

An over-inflated US tech market and diversification to developing economies is encouraging family offices to return to Chinese stocks embracing technology at lower cost.
As the Covid crisis developed in 2020, two asset allocation trends became apparent among family offices. Firstly, a much greater interest in environmental, social and governance (ESG) investments emerged, as families began to appreciate nature and think about healthcare issues that may have led to transmission of viruses.

Secondly, a liquidation of positions in Chinese equities continued, related to the source of the virus, the US geopolitical standoff with Beijing and the mistreatment of Uigur minorities in the country’s Xinjiang region.

But despite these influences persisting, many families are beginning to reconsider Eastern allocations, as technology sourced in the start-ups of Hangzhou and the Pearl River Delta begins to gain traction on the global stage.

This also forms part of a more general trend of wealth managers seeing greater value in emerging markets, as well as most non-US developed markets, particularly in an environment where unstable US policies — or presidential announcements — are driving market uncertainty.

“Family offices will make a comeback. From a diversification standpoint, it makes strategic sense,” says William Chow, deputy chief executive at the Raffles Family Office in Hong Kong.

Not only do Chinese valuations look attractive compared to over-inflated US tech stocks, but the DeepSeek “game-changer” has alerted investors to potential of achieving the same outcomes as high-end, more advanced chips, at much lower cost.

For most family offices, he says, China allocations account for less than 5 per cent, which is “far too underweight for the world’s second-largest economy”. He expects investors to gradually return to China over the long term.

“We don’t see investors pulling out of China completely, in fact, China is simply too big for anyone to ignore,” agrees Joseph Poon, group head of DBS Private Bank in Singapore. “Fundamentals are still intact, and stimulus measures implemented last year – including rate cuts, support for local financial markets, and easing of home buying restrictions — indicate the government’s willingness to step up support for the economy.”

Recent performance of the Chinese stockmarket has attracted fund inflows as forward earnings multiples remain attractive at 10-11 times, he says, presenting “an effective diversification for a client’s portfolio, especially for those who have profited from US stock gains in recent years”.

Chinese stocks have certainly been “on the tear”, at the beginning of 2025, according to strategists at Invesco. Year-to-date as of February 15, the MSCI China Index has risen 13.9 per cent, dramatically outperforming the MSCI USA Index’s 4.4 per cent gain.

One initial catalyst for the rally, which began at the end of 2024, was significant stimulus from Beijing policymakers. But more recently, it appears to have been driven by advances in artificial intelligence (AI).

Tech titans on parade
This is backed by renewed faith in Chinese technology from Beijing’s authorities, vividly demonstrated by the public rapprochement of president Xi Jinping and Jack Ma, founder of the Alibaba Group, previously discredited after criticising government policies. This was part of a highly choreographed meeting with Chinese tech entrepreneurs.

“My sense is that the recent news report about Alibaba’s possible tie-up with Apple on AI, following in the footsteps of the DeepSeek disruption, has resulted in renewed interest by global investors into China, including family offices along with the major asset management firms,” says Angelina Lai, chief investment officer at St James’s Place for Asia and the Middle East, based in Hong Kong.

Ms Lai will be one of the key speakers at the forthcoming PWM Wealth Management Summit Asia, to be held in Singapore on March 13 2025.

In the immediate aftermath of Covid, as the Chinese market weakened, she explains, there was increased interest in India, based on strong economic growth and positive demographics.

“There was also interest to diversify into other economies benefiting from the ‘China + 1’ phenomenon, where businesses diversify their investment and supply chains beyond China to soften impacts related to tariff and political risks, such as Vietnam and other countries,” she adds, with Japan also benefiting from corporate governance reforms.

But a “trend reversal” is now on the cards, accompanied by a “realisation” that Chinese valuations are looking increasingly attractive relative to the market, plus “possible signs of green shoots emerging on consumption”. This is evidenced by strong householding spending around the Lunar New Year, bringing the CPI back into positive territory with a 0.5 per cent year-on-year rise in January.

“My sense is that the recent news report about Alibaba’s possible tie-up with Apple on AI, following in the footsteps of the DeepSeek disruption, has resulted in renewed interest by global investors into China,” says Angelina Lai from St James’s Place
DeepSeek drama
Tech-driven Chinese companies, according to Raymond Ma, Invesco’s chief investment officer for Hong Kong and Mainland China, will likely benefit from higher efficiency, cost savings, stronger computing power and a much lower barrier for various industries to use AI. All these benefits, apparent in the dramatic DeepSeek story, will likely lead to a re-rating of Chinese stocks, he believes.

Additionally, car manufacturer BYD, which is increasingly supplying electric vehicles to European consumers at more affordable prices than competitors, is causing a “paradigm shift”. While Chinese stocks have had attractive valuations for several years, appearance of these important catalysts is making a difference, according to Invesco, which can lead to a “long runway” ahead.

Although Western investors into China and Asia as a whole tend to focus predominantly on geopolitical considerations, linked to their own currencies and interest rates, this could be about to change, believes Mr Poon at DBS.

“We are expecting the development of major Asian giants, where earnings are either derived from large domestic markets, or come from companies with global earnings and strong economic moats that can compete internationally,” he says.

It is also important for family offices to have a closer look at the numbers, when deciding if to invest in China, focusing beyond the geopolitics of trade wars, say analysts.

“The US share of global trade has reduced significantly compared with 15 years ago, as 90 out of the world’s 190 countries now trade more than twice as much with China than with the US,” says Ms Lai at St James’s Place. “This reduces China’s vulnerability to US tariffs.”

But wealth managers also offer a note of caution and advice to look at longer-term trends.

Although discerning investors are doubtlessly attracted to cheap valuations presented by Chinese tech, notwithstanding geopolitics, “they need to see the Chinese government decisively address the real estate overhang”, says Mr Poon at DBS.

“The current market is still riding on momentum, and short-term volatility remains a factor,” warns Mr Chow at Raffles. “As the fundamentals of these innovations become clearer, we can expect renewed interest from global investors, including family offices toward China.”