This article first appeared in Capital, The Edge Malaysia Weekly on December 30, 2024 - January 12, 2025

THE US and Chinese stock markets have delivered solid gains in 2024, but the factors driving their performances were starkly different.

In the US, the S&P 500 and Nasdaq Composite have gained about 25-30% year-to-date (YTD), driven by advances in artificial intelligence (AI) and a favourable macroeconomic backdrop.

In contrast, Chinese equities — represented by the Shanghai and Shenzhen indices, as well as the Hang Seng Index — have risen by around 10-15% YTD, bolstered by government stimulus initiatives aimed at restoring investor confidence.

The US rally, underpinned by AI-driven innovation, has fuelled significant growth in sectors such as semiconductors, technology, healthcare and finance. While this has spurred optimism over long-term opportunities, questions are emerging over the sustainability of this reliance on AI as a primary driver of growth.

After all, the evolution from the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — to the Magnificent Seven — Apple, Microsoft, Amazon, Alphabet (Google's parent), Meta, Tesla and Nvidia — has fuelled the performance of both US and global equity markets over the past few years.

At the same time, cooling inflation and expectations of interest rate cuts by the Federal Reserve have provided further tailwinds, although analysts caution against ignoring other key economic indicators, such as corporate earnings and consumer spending.

China’s market, on the other hand, has relied heavily on state-led measures to stabilise an economy grappling with structural challenges, including a weak property market and mounting debt concerns. While stimulus announcements have offered a short-term boost, the lack of detailed execution plans raises uncertainty over their long-term effectiveness.

For Malaysian investors, balancing exposure between the innovation-led rally in the US and the policy-driven recovery in China requires careful consideration of growth potential, valuation risks and global economic trends.

UOB Kay Hian (Hong Kong) Ltd private wealth management chief investment officer Wang Qi believes there is a “70% chance” that AI is sustainable as a long-term growth driver for US equities.

“The focus is on the long-term, while the short-term volatility is always a fact of life. Potential risks include the high concentration of AI stocks, including the Big Tech names accounting for a ‘disproportionate’ percentage of the market; the lack of viable commercial applications for AI; and regulatory risk that may slow down AI development,” he tells The Edge.

Boutique fund house Tradeview Capital Sdn Bhd CEO and founder Ng Zhu Hann observes that the AI theme driving stock markets globally has been on full throttle since last year when OpenAI unveiled ChatGPT and the actual use case of the AI functions.

This led to a series of launches by other rival tech companies such as Google’s Bard — subsequently rebranded as Gemini — as well as Grok of xAI by Elon Musk and others.

“The adoption of AI in daily life has always been the biggest concern but with the use case coming to life, many are seeing the need for supercomputing power to drive the innovation,” he tells The Edge.

Being the leader of the pack, Nvidia’s share price has soared to astronomical heights due to the surge in demand for its graphics processing unit (GPU) chips, which are essential to powering the AI innovation.

Ng points out that OpenAI, which is leading the AI innovation use case, is not profitable. In comparison, Nvidia, which is the manufacturer of chipsets, is the direct beneficiary of the AI boom with real numbers to show for.

“AI platforms are in fact still bleeding despite rising valuations. I am of the view that while the theme is here to stay, it is too hot to keep the stock price rising without earnings coming into play to sustain the investment thesis in the medium term. There will also be a valuation normalisation in due course if the cash burn rate for these companies becomes unsustainable,” he warns.

Moomoo Malaysia CEO Ivan Mok points out that companies leveraging AI have reported enhanced operational efficiencies and unlocked new revenue streams, fuelling market optimism.

According to him, projections indicate that by 2025, over 40% of core IT spending by leading global organisations will focus on AI initiatives, contributing to double-digit growth in product and process innovations. Besides, global AI spending is expected to reach US$632 billion by 2028, highlighting its long-term potential.

“However, the sustainability of AI-led growth depends on the consistent delivery of tangible outcomes and responsible innovation. As AI adoption scales, risks such as data privacy violations, security breaches and market concentration are likely to attract heightened regulatory scrutiny. Companies must address these challenges to maintain investor confidence,” he cautions.

Additionally, Mok emphasises that reliance on AI-driven gains exposes markets to valuation risks.

“If market expectations outpace actual value delivered by AI initiatives, overvalued stocks could face significant volatility. Diversifying portfolios to include sectors with less dependency on AI can help mitigate these risks while capitalising on its transformative potential. A balanced and sustainable approach to AI innovation will be essential for ensuring its long-term contribution to equity markets,” he advises.

Billy Toh Kian Hin, regional head of retail research at CGS International Securities Singapore Pte Ltd, acknowledges that the AI boom has propelled the US stock market higher with giants such as Microsoft and Nvidia driving the charge.

But to sustain the momentum, companies must deliver robust earnings growth to justify current valuations. For instance, Oracle’s recent earnings fell short of expectations, highlighting the risks of overvaluation in the AI sector.

“Going forward, investors will need to be more selective, prioritising companies with demonstrated growth and clear strategies for capitalising on AI, rather than indiscriminately chasing all AI-related stocks,” he stresses.

The US economy is set to end 2024 on a solid note, with gross domestic product (GDP) growing 3.1% in the third quarter of this year, according to the final estimate for the period. The US economic growth was previously reported at a 2.8% pace. This is driven by rising private consumption and a healthy labour market, which maintained an unemployment rate near 3.9% as of October.

About two years ago, the Fed had hiked its policy rate by 5.25 percentage points between March 2022 and July 2023 to tame inflation, which surged to a four-decade high of 9.1% in June 2022. The US inflation had eased to 2.6% in October, down from 7.7% in October 2022, edging closer to the Fed's 2% target. Citing the US economy's continued resilience and still-elevated inflation, the Fed is now projecting two rate reductions in 2025.

UOB Kay Hian’s Wang highlights the importance of the economic context of how the market interprets inflation and the Fed rate cuts.

“The current rally is mainly driven by the investor belief of ‘no landing’ of the US economy. So, the US economy, especially consumption (70% of US GDP), is something investors need to track closely,” he advises.

In addition, corporate earnings are also important, not just in supporting the market rally but also in the high valuation of AI stocks.

“There is a possible feedback loop from the stock market to consumer confidence and spending. I believe the US consumption strength is partly due to the strong stock market. This is a form of ‘reflexivity’ proposed by George Soros. In other words, investors’ expectations for a strong economy become self-fulfilling,” Wang explains.

Tradeview’s Ng says the US rate cut in essence means there will be a lower cost of capital, hence encouraging fund flow into riskier asset classes such as the stock market.

Moreover, he notes the US stock market has been the focal point for fund flows in part due to resilient economic numbers — despite the fear of recession at the start of 2024 which has been proven wrong — and the thematic play in the tech sector.

But more importantly, while the Fed rate cuts could provide some cushion in a slowdown, it would seem that the US stock market has been on overdrive in the past month largely due to Donald Trump’s presidential election win.

“Trump’s political rhetoric has spurred lots of pro-US stock market sentiment and hence the euphoria. However, I would pay attention to economic indicators like the unemployment rate, inflation, producer price index and also the commercial real estate numbers, which are a major risk to the US economy as a whole,” says Ng.

Moomoo’s Mok says the American labour market is a critical area to monitor. That’s because strong employment levels drive consumer spending, which accounts for over two-thirds of US GDP.

However, if wage growth outpaces productivity gains, it could create margin pressures for businesses, offsetting the benefits of lower rates.

“Geopolitical stability also plays a significant role, as ongoing US-China trade tensions or disruptions in global supply chains could impact sectors such as technology and manufacturing,” he adds.

While cooling inflation and anticipated rate cuts provide positive tailwinds for the market, CGS’ Toh opines that they alone are not enough to sustain the rally.

Therefore, investors must also closely monitor corporate earnings growth, consumer spending and labour market trends to assess the underlying strength of the US economy.

“Additionally, the return of Trump to the White House and the policy direction of his administration could play a pivotal role in shaping market sentiment and investment strategies moving forward,” he says.

In November, China announced a five-year stimulus package worth RMB10 trillion (US$1.4 trillion or RM6.1 trillion) aimed at addressing local government debt issues, with further economic support measures expected in 2025.

However, the debt swap programme fell short of investor expectations, as many were anticipating more direct and substantial fiscal intervention. The announcement also lacked clarity on the specific mechanisms for disbursing the allocated funds, raising doubts about its immediate impact on the broader economy.

As of end-2023, Chinese household wealth was estimated at RMB531 trillion, with RMB40.2 trillion held in stocks and RMB138 trillion in deposits. This indicates significant untapped capital, presenting an opportunity for increased retail investor participation in the stock market.

“When was the last time you got any satisfying details from the Chinese government? China is not always transparent, which is both good and bad,” UOB Kay Hian’s Wang observes.

The policy impact on the market is two-fold, he remarks. The first is right after the announcement, as a booster to investor confidence.

“Since Sept 24, most of the policy announcements have had a positive impact on the market. The government is saying things that investors want to hear. This is a good sign because it shows China cares about the market, not to mention the direct support for the stock market,” he observes.

The second impact, says Wang, is from the macro data improvement as the policies take effect. This is yet to come.

Tradeview’s Ng notes that the Chinese stock market reflects the growth downtrend of China's economy for the past five years.

“China's economy is suffering from the brunt of the trade war and the impact on the real estate market, where the bulk of the citizens’ and provincial government’s wealth is concentrated. After 20 years of spectacular economic growth, China did not once suffer a true crisis or economic recession unlike this round, although the numbers provided by the Chinese government still show growth in GDP,” he says.

In his view, China is going through a major deflation across asset classes, be it through the collapse in the real estate sector, ballooning debt or the high youth unemployment rate. Therefore, China’s problem cannot be resolved via a government stimulus package alone because no matter how big, the market is always expecting more.

“It is my view that the only way China can get out of the rut is if the economy goes through a transition from being overly dependent on real estate and infrastructure to services and technology coupled with the de-escalation of the trade war and tariffs between China and other Western countries.

“Only then consumer and investor confidence will return. I do think that the China market is at the bottom but to rebound, it requires a catalyst and confidence,” Ng surmises.

Moomoo’s Mok admits that the effectiveness of China’s stimulus measures depends heavily on execution. While the language of policymakers has shifted toward “proactive” fiscal policies and “moderately loose” monetary policies, the lack of specifics leaves room for uncertainty.

“Structural challenges, such as an over-leveraged property market, demographic shifts and high corporate debt, remain significant headwinds. Without clear strategies to address these, broad announcements risk being perceived as temporary fixes rather than long-term solutions,” he elaborates.

Geopolitical factors further complicate the picture, as renewed trade pressures and potential tariff escalations by key partners pose significant risks to China’s export-driven industries.

Mok reiterates that long-term market performance hinges on China’s ability to complement stimulus efforts with structural reforms. The government’s ability to translate these announcements into actionable policies — such as targeted tax cuts, support for private enterprises, and improvements in local government debt management — will determine whether this stimulus marks a turning point or is merely a short-term boost.

“Sectors such as green technology, healthcare and renewable energy present promising opportunities, aligning with both global demand trends and China’s policy priorities. These industries offer more stable investment prospects compared to the short-term gains driven by government intervention,” he says.

According to Mok, the growth trajectories of the US and Chinese markets this year highlight two very different stories.

The US market’s approximately 30% growth has been driven by innovation and investor enthusiasm around transformative technologies, particularly AI. China's 15% growth, on the other hand, reflects a more policy-driven recovery. The government’s stimulus measures have played a significant role in stabilising sentiment.

“For investors, these dynamics underscore the importance of diversification. Striking the right balance between these markets is critical to managing risk and capturing upside in today’s complex global landscape.

“A balanced approach that includes both US and Chinese equities makes a lot of sense for Malaysian investors. These two markets represent distinct opportunities, and their complementary growth drivers can provide diversification and resilience to a portfolio,” he says.

Ultimately, says Mok, the decision is not about choosing one market over the other — it’s about finding the right mix.

CGS’ Toh says Malaysian investors should consider diversifying into both US and Chinese stocks, with a stronger focus on US equities given their innovation-led growth.

Companies like Microsoft, Nvidia and Tesla are driving the AI revolution, while defence firms such as Palantir Technologies are tapping into AI for national security, creating robust opportunities.

“However, caution is needed as valuations in high-growth sectors remain elevated, and potential US policy changes, such as corporate tax cuts or tariffs, could impact market dynamics,” he warns.

Given a choice, Tradeview’s Ng would sell into strength in the US stock market and realise gains along the way. For Chinese stocks, he would adopt the opposite approach and position gradually.

“Taking bite-size positions and adding upon weakness for companies that are fundamentally sound, with good dividend yield or cash flow would be a safe approach. Avoiding politically sensitive companies is a safer route. It is very hard to convince myself to add a large position in the US stock market, given the irrational exuberance going on now,” he advises.

According to him, the US stock market is building on a higher-highs rally, whereas the Chinese stock market is building on a relief rally from the bottom. Both are at polar opposites. Some are considering the Chinese stock market ripe for bottom fishing or positioning, while for the US, it is simply a momentum trade capitalising on the political tailwind of Trump’s election campaign.

“Between both, I would prefer to avoid the US stock market at the current steep valuation and lack of fundamental earnings to support its investment thesis. On the contrary, we are looking to position gradually into China but the horizon of our investment thesis is longer. We are ready to hold and that means waiting for returns to materialise. It is somewhat a contrarian approach,” says Ng.

While the geographical allocation is important and easy to understand, UOB Kay Hian’s Wang believes this may be outdated in today’s environment. Instead, he suggests that investors take a global and thematic approach.

“For example, if an investor wants to invest in AI, our job at UOB Kay Hian is to find him or her the best available opportunities regardless of the US or China. Of course, today the best AI investments are mostly from the US.

“Likewise, if the investor wants to invest in electric vehicles, we can help the investor find the best investments regardless of location. The country weighting then becomes a natural result of your investment themes and beliefs,” he adds.

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