The launch of Chinese AI start-up DeepSeek has renewed investor interest in the shifting dynamics of the global technology sector.
During a webinar on Thursday, Fidelity International highlighted how current market volatility has revealed the risks of over-reliance on mega-cap tech stocks, particularly those in the United States.
Terence Tsai, portfolio manager at Fidelity International, pointed to growing awareness of a possible transition in tech leadership, driven by rising Chinese innovation and broader opportunities outside the US.
“Over the past two years, the technology market has been driven by a few distinct characteristics: the rise of perceived artificial intelligence winners, investor momentum, and the fear of missing out (FOMO) as investors pursued the perceived beneficiaries of US exceptionalism,” Tsai said.
"This resulted in a market dominated by the so-called ‘Magnificent 7’. These few companies were responsible for over half of the S&P 500’s 58 per cent return over the two years spanning 2023 and 2024.
“Consequently, market concentration has increased, with the Magnificent 7 accounting for approximately one-third of the S&P 500 Index at the start of the year,” he said.
According to Tsai, the current risk in technology markets resides in the tendency to “extrapolate and assume that this concentrated rally will continue indefinitely”.
“US companies make up 80 per cent of the MSCI World IT Index but the US is not 80 per cent of the world’s innovation. Looking for technology stocks outside of the US offers diversification and an opportunity to own high-quality companies at a discount,” he said.
One such area is China, Fidelity’s Tina Tian said, explaining that DeepSeek has prompted a reassessment of structural investment opportunities within China’s tech sector.
Speaking alongside Tsai, the portfolio manager said: “We observe compelling investment opportunities within China’s technology sector.”
“While the sector’s broad valuation remains below historical average levels, a selective approach is still necessary. We seek opportunities in AI applications that benefit from more affordable AI, such as select software companies that now integrate AI into their offerings to enhance performance while remaining cost-effective,” Tian said, adding that domestic technology substitution in semiconductor equipment is also worth monitoring.
From a cyclical perspective, Tian noted that aside from AI, the general tech sector has experienced a relatively slow recovery.
Turning to tariffs, she said while a US federal court blocked most of President Donald Trump’s “Liberation Day” tariffs on Thursday – ruling that he exceeded his authority under the constitution – the tariffs will still result in higher costs for the global tech sector.
“Tariffs are just a part of the strategic rivalry between the US and China,” she said, forecasting lower interdependence between the two countries moving forward.
“For China, it’s really important to build that localisation, self-sufficiency in technology. That’s what makes the investment into China’s tech so interesting at this point.”
Echoing Tian’s views in a note on Thursday, Nicholas Yeo, aberdeen Investments’ head of China equities, outlined the significant advances in China’s generative AI, with Chinese internet platforms, EV makers and domestic IT hardware names all set to benefit.
“Additionally, we believe high-quality companies with minimal trade exposure to the US should provide investors with some defensiveness amid anticipated market volatility,” Yeo said.
He explained that while Taiwan and South Korea have long been at the forefront of the global technology boom, especially in semiconductors, “we are also seeing China rising”.
“As AI and the broader tech sector advances, China will remain a key beneficiary given its role in the global tech landscape,” he said.
Aside from this, he added that further stimulus encouraging more consumption by China’s large population will be a boon to consumer-facing companies.
“This not only captures a middle class that is growing in size and spending power, but also new ways of consuming with a priority on upwardly mobile consumer experiences and digital products over physical goods bought in brick-and-mortar stores,” Yeo said.
Ultimately, he stressed that despite ongoing trade tensions and global uncertainty, “China is in a strong position for steady economic and market growth.”
“It has a competitive tech ecosystem and a vast domestic market. It has both the capacity and willingness to make substantial foreign direct investments, giving it significant leverage should the US try to peel off trading partners,” he said.
“Despite ongoing trade tensions and global uncertainty, China is in a strong position for steady economic and market growth.”
As such, he suggested investors look past short-term issues and “focus on the long-term changes shaping China’s economy”.
“With low stock valuations, solid government backing and fast-growing sectors, Chinese equities offer a strong long-term investment opportunity.”
