Innovation core to AI trade in China’s two-speed economy: BlackRock executive

[SINGAPORE] Investors interested in China’s artificial intelligence story should focus on innovation plays, given that China’s two-speed economy discourages a broad allocation into the market.

While China has pockets of markets that are doing well and set to drive innovation – such as in low-cost AI models, robotics and power storage – domestic demand is still slow, said Gargi Pal Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock.

“This is where we are telling investors to take a more active approach, so that you are going to get those specific parts of the innovation, as opposed to a broad China allocation,” Chaudhuri said in an interview with The Business Times.

This comes as Chinese equities are receiving more interest in recent times as investors recalibrate their portfolios, having been underweight on China relative to benchmarks in recent years.

Chaudhuri noted that Asian equities are the biggest conviction for clients in the Asia-Pacific region currently, driven by interest in semiconductor plays in South Korea and Taiwan, as well as a reversal of the outflows from Chinese markets.

Taiwan and South Korea – being central to the semiconductor and memory supply chain that powers AI – will likely continue to see inflows, Chaudhuri said.

This comes as global AI adoption is still at its infancy, with interest in agentic AI further driving demand.

“With the compute and memory story continuing to remain a choke point right now, we do think that investors will probably continue to drive flows and performance within these two markets,” she said.

Companies in these two markets are also getting less expensive from a price to earnings perspective, with valuations down because earnings growth has been “so supportive and so solid”.

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But Chaudhuri warns that volatility is going to remain in the markets, which is typical in cases where new technology is driving price action and client adoption and flows.

“We’re constructive, but constructive does not mean calm,” she said.

Hence, as much as it is important for investors to have AI in their portfolios to tap on the AI growth, Chaudhuri said it is just as important for investors to diversify beyond and around the AI train. 

This also means allocating to areas that do not trade in the same direction as equity markets.

Several other Asian markets are good representations of that: India, which is a demographic story; Japan, a demographic story; and the Asean region, a domestic demand story.

Chaudhuri expects India to serve as a good AI hedge, as it has not benefited from the bottlenecks in power, memory and compute, and it is also underperforming due to exposure to the software disruption.

India and Asean also remain structurally important in a client’s portfolio given strong demographics, digitisation and infrastructure investments. 

This is especially since bonds have become a less reliable hedge, with AI driving high correlations across sectors and regions. 

Investors should still focus on income as a source of resilience in a portfolio as investors can benefit while not taking a lot of interest rate sensitive risk. 

But Chaudhuri noted that a lot of US corporate credit supply is tied to AI, as many of the hyperscalers are issuing bonds.  

Meanwhile, this trend is not reflecting in Asian credit markets, making it a good asset class for both diversification and income.

“The recognition that you’re getting a little bit of that diversification away from the same themes around AI – I think that’s what’s important,” she said.