China Equity Strategy_How crowded is the AI trade right now_

Summary of China Equity Strategy Conference Call Industry Overview - The focus is on the AI-related stocks in China and their performance compared to global counterparts, particularly in the context of crowding metrics and institutional investment trends [1][2]. Key Points 1. Crowding Metrics: - Current crowding data indicates that while crowding for China's AI stocks has increased, it remains low compared to the peak in June 2023. The crowding score for US AI stocks increased by 0.2 over two years, while China's increased only by 0.02 year-to-date [1]. - A-share AI stocks have underperformed compared to offshore counterparts, with institutional positions elevated before the rally but subsequently reduced [1]. 2. Performance Comparison: - AI-related stocks in China are up 24% year-to-date, outperforming the broader MSCI China index by 9%. HK and ADR internet and tech stocks rose 31%, while A-share tech stocks increased by 9% [2]. - Institutional investors were overweight in A-share tech prior to the rally, while they were underweight in HK and ADR stocks, suggesting potential for increased institutional holdings in the latter [2]. 3. Market Outlook: - The MSCI China index is trading at 11.3x forward P/E, close to the historical average of 11.7x, indicating potential for near-term consolidation as investors await earnings results and policy reviews [3]. - Preference is given to A-shares over HK stocks due to their underperformance year-to-date (-16%) and resilience to geopolitical issues [3]. 4. Investment Strategy: - The analysis suggests that stocks with reasonable but improving crowding metrics are likely to outperform in the near term. As a result, Alibaba has been added to the model portfolio, replacing PDD Holdings [4][19]. 5. Sector Preferences: - The report remains positive for the full year, citing supportive government policies, improving company profitability, and a slowdown in property price declines. Preferred sectors include high-dividend names, internet, A-share TMT, and select consumer stocks [7]. Additional Insights - Institutional Flow Data: There is evidence that long-only investors, particularly from emerging markets, have begun to reallocate to China positions year-to-date, indicating a potential shift in investment sentiment [2][18]. - Risks: The report highlights risks such as a hard landing in the property market, capital outflows due to currency depreciation, and slow structural reforms, which could impact market stability [39]. This summary encapsulates the key insights and strategic recommendations from the conference call, focusing on the dynamics of AI-related stocks in China and the broader market context.