Deciphering the Mystery Behind the Divergence of Tech Stocks
- Global tech stocks have surged driven by AI capital expenditure, but the Hang Seng Tech Index lags due to its heavy weighting in consumer-facing applications.
- The Hang Seng Tech Index has less than 20% weight in AI upstream hardware and semiconductors, with over 50% concentrated in e-commerce, social media, and other areas affected by weak domestic demand.
- Chinese AI computing companies are mostly listed on the A-share market, with the STAR 50 and ChiNext indices rising over 45% and 30% year-to-date.
- Starting June, two pure AI stocks will be included in the Hang Seng Tech Index, and AI weighting is expected to rise to around 40% over the next 12 months.
- The current index valuation is attractive, and structural transformation combined with external demand may offer catch-up opportunities.
Standard Chartered Bank's Chief Investment Officer for North Asia, Zheng Zifeng, believes that from a valuation perspective, the Hang Seng Tech Index currently has a forward 12-month P/E ratio of about 18 times, with expected earnings growth of over 30%, making it still attractive. (Reuters)
While global tech stocks, driven by artificial intelligence (AI), have entered an unprecedented super cycle and repeatedly hit all-time highs, the Hang Seng Tech Index has shown a significant divergence.
Driven by strong AI capital expenditure, the MSCI World Information Technology Index has risen over 25% year-to-date, while the Hang Seng Tech Index has underperformed. Understanding the structural and macroeconomic factors behind this clear divergence is crucial for assessing whether China's tech sector has catch-up opportunities in the remainder of the year.
AI Upstream Layout Dominates Tech Stock Rally
This year, one key factor behind global stocks outperforming other asset classes is AI capital expenditure. We have recently raised our 2026 AI capital expenditure growth forecast from 54% to 65%. Higher capital expenditure naturally translates into better earnings prospects for AI computing hardware and infrastructure manufacturers, making upstream segments of the tech supply chain the strongest performers this year.
On the other hand, hyperscalers, which are the main investors in AI capital expenditure, have seen divergent stock performance depending on market assessments of their investment returns. Software stocks have also been affected by concerns about potential disruption from AI. This performance difference within the tech sector also explains why the U.S. Nasdaq Composite Index, which is heavily tech-weighted, has risen only about 15% year-to-date, lagging behind the semiconductor-heavy South Korean and Taiwanese stock markets, which have surged over 100% and 60% respectively. While global peers benefit from the growth dividend of AI upstream computing hardware and infrastructure, the composition of the Hang Seng Tech Index is quite different.
Low Allocation to AI Upstream in Hang Seng Tech Index
The Hang Seng Tech Index's constituents are mainly focused on AI applications, with structurally low allocation to AI upstream infrastructure. The index's weight in AI computing hardware, semiconductors, and server infrastructure is below 20%; conversely, over 50% of the weight is concentrated in application-based internet giants such as social media, e-commerce, and food delivery platforms, and about 15% in electric vehicle manufacturers.
These consumer-oriented industries have performed poorly due to weak domestic demand in China, gradual withdrawal of subsidies, and intense price competition. Even though the average return of the few upstream hardware-related components in the index exceeds 50%, it is not enough to offset the negative impact of the high-weight underperformers.
Where Are China's AI Computing Listed Companies?
This unbalanced index structure raises the question: "Where are China's AI computing listed companies?" In fact, many such companies are listed on the A-share market, especially on the Shenzhen ChiNext (considered China's Nasdaq) and the Shanghai Stock Exchange STAR Market (SSE STAR 50).
Year-to-date, the STAR 50 Index and the ChiNext Index have risen over 45% and 30% respectively, indicating that China's domestic AI computing sector is not underperforming other markets. However, the main investors in the A-share market are domestic investors.
The good news is that Hong Kong welcomed its first IPO of a Chinese AI GPU chip maker in January this year. The company's share price has more than tripled from its issue price within a few months of listing, reflecting strong returns as a direct beneficiary of China's AI capital expenditure and chip self-sufficiency policies. However, despite trading for some time, the stock still does not meet the strict conditions for inclusion in the Hang Seng Tech Index, including trading history and fast-entry market capitalization thresholds.
Structural Transformation Brings Catch-Up Opportunities
Notably, starting in June, two pure AI concept Chinese stocks will meet the fast-entry conditions and be included in the Hang Seng Tech Index, with an initial combined weight estimated at about 5% to 7%, potentially rising to nearly 10% over time.
The inclusion of the first batch of pure AI concept constituents on June 8, 2026, marks the beginning of a structural shift for the Hang Seng Tech Index. This will help the index gradually shift from being heavily concentrated in e-commerce and EVs to the rapidly expanding AI ecosystem. We expect the weight of AI-related constituents to rise to about 40% over the next 12 months.
Additionally, if market risk appetite improves due to the gradual reopening of the Strait of Hormuz, it could further accelerate capital market activities in the Hong Kong AI supply chain, where such companies already account for over 40% of expected IPOs. Among them, several proposed listings are high-profile business units spun off from large internet platforms. Successful listings could not only unlock value for parent companies (which are themselves important constituents of the Hang Seng Tech Index) but also drive a revaluation of the entire index.
From a valuation perspective, the Hang Seng Tech Index currently has a forward 12-month P/E ratio of about 18 times, with expected earnings growth of over 30%, making it still attractive. As more high-growth AI constituents are included, earnings visibility is expected to improve and drive valuation multiple expansion.
Furthermore, as downstream industries gradually adopt AI and achieve monetization, the semiconductor-led tech stock rally is expected to spread to broader sectors, creating new revenue streams and accelerating earnings growth. In the context of the "anti-involution" push, the toughest period for EV and e-commerce industries may be over. If these high-weight stocks can effectively execute this transformation, they have the opportunity to see a strong earnings recovery from the trough.
Room for Improvement in Chinese Consumer Confidence
Of course, uncertainties remain. Recent economic data shows Chinese consumers remain cautious, with retail sales in May falling 0.6% year-on-year. Companies reliant on domestic consumption may continue to face challenges. However, supported by high global oil prices and capacity expansion over the past few years, exports of high-value goods such as EVs could bring upside surprises.
Strong external demand may partially offset weak domestic demand, filling the growth gap during the transition period as consumer-oriented constituents gradually cede weight to high-growth pure AI companies.
Overall, as the Hang Seng Tech Index is about to undergo a structural transformation, its current valuation discount is more likely a reflection of short-term mismatches rather than a long-term discount, thus presenting an attractive catch-up opportunity.
(The author is Zheng Zifeng, Chief Investment Officer for North Asia at Standard Chartered Bank)
