A U.S-China trade truce means more localized tech. Here’s how to play it
As the U.S. and China settle into an uneasy one-year truce, the takeaway for investors is that each country will double-down on homegrown technology, analysts said. “Own quality exporters and R & D-rich tech stocks aligned with localization, and use scenario odds — not headlines — to assess risk,” Morgan Stanley strategists recommended in a report this month on how to navigate the new “export control regime.” “The strategic rivalry remains unresolved, with technology, critical supply chains and capital markets at the heart of ongoing tensions,” the report said. While Washington has restricted Chinese access to advanced technology and encouraged artificial intelligence-related investment in the U.S., China is ramping up its own spending and resource allocation to advanced technology in its upcoming five-year plan. Semi computing power Core to the AI race is computing power, namely in semiconductors. Morgan Stanley’s top pick is SMIC, China’s domestic chip giant. The analysts rate the Hong Kong-listed shares overweight, and have an 80 Hong Kong dollar ($10.28) price target. That’s more than 16% above where the stock closed Friday. “Given U.S. export controls and expanding capacity, we expect SMIC to receive more orders for advanced node manufacturing,” the analysts said. “We also believe SMIC’s advanced node capacity expansion will support the AI semi development in China.” Another growing concern is whether companies will have enough energy to power AI. Goldman Sachs analysts this month predicted that by 2030, China will have spare power capacity more than three times what the world will likely need then to power data centers. For the year ahead, HSBC late last week called energy self-sufficiency one of the new themes that will drive regional stocks. “We believe the Asia equity story in 2026 will be led by a pivot away from crowded AI trades,” its analysts said. The bank’s leading pick was Hong Kong-listed small cap Harbin Electric, which had more than 60% upside to HSBC’s 22 HKD target price, based on Friday’s close. “Harbin Electric commands around one-third to half of the domestic market share in power equipment for coal, nuclear and hydro power equipment, with these sectors contributing nearly 70% to its revenue (in 2024),” the HSBC analysts said. “Harbin is an asset-light business model and receives prepayments from customers.” Robot hardware In terms of AI commercialization, companies in China are vying with their U.S. peers not only for software advances but hardware applications, particularly in humanoid robots. Goldman Sachs analysts visited nine humanoid robot supply chain companies earlier this month and found that most are “actively planning capacity in both China and overseas (primarily in Thailand, and less in Mexico)” to support possible mass production — to the tune of 100,000 to 1 million units a year. While that may be overly optimistic compared to Goldman’s projections of 1.38 million annual humanoid shipments by 2035, the analysts said suppliers are moving aggressively and have mentioned their customers include well-known humanoid players Tesla Optimus, Agibot and Xpeng. Goldman’s only buy-rated Hong Kong play is Sanhua, which management says is taking a more conservative approach by ramping up production based on actual customer orders. Sanhua has also reserved capacity in Thailand for humanoid robot parts production. Despite the excitement about longer-term tech innovation, markets in the near term will still be focused on the latest U.S.-China trade talks. The two sides have yet to reach a firm deal on rare earths exports, although U.S. Treasury Secretary Scott Bessent has indicated one could happen by Thanksgiving. All this means that Chinese stocks are likely to remain highly volatile. “We consider this truce fragile, given persistent U.S.-China competitive confrontation on multiple fronts,” the Morgan Stanley analysts said, “which means rolling negotiations, truces and periodic flare-ups will likely be the new norm for the foreseeable future.” Morgan Stanley said that the MSCI China index tends to see short-term corrections following periods of U.S.-China tension. But they found that “technology hardware and semiconductor names often rebound within a month after their initial sharp declines.” —CNBC’s Michael Bloom contributed to this report.
Post Comment