DeepSeek’s rise is the catalyst that will prompt global investors to allocate more toward Chinese stocks, even as economic worries persist, analysts predict. “Before the overarching talk was, China is uninvestible. … Now you definitely see people start thinking it probably helps to have China,” said Liqian Ren, leader of quantitative investment at WisdomTree. It’s a realization that “the macro environment can be still cool in China and you still see innovation,” Ren said, adding she expects progress in the next few years in Chinese drug development and other areas. “DeepSeek is the tip of what’s likely to come.” The Chinese AI startup released an open-source model in January that surprised many U.S. tech investors with the ability to share its thought process and claims to undercut OpenAI drastically on costs — despite U.S. export controls on advanced semiconductors. High-flying U.S. chip giant Nvidia plunged about 17% on Jan. 27 in its worst day since 2020 as global tech stocks dropped . The development “raises questions about the vast sums that are currently being invested in AI and whether it will turn out to be money well spent,” David Chao global market strategist, Asia Pacific, ex-Japan, at Invesco, said in a Feb. 3 note. “I expect the current high concentration in the US stock market to be a temporary phenomenon.” “I would just add that it favors an equally weighted approach to the US market, US small-mid caps over mega caps and Chinese equities vs US equities,” he said. “Chinese equities, and especially Chinese technology companies are priced at a steep discount compared to their American counterparts, and similar to the AI development gap narrowing, so too is the valuation gap.” DeepSeek shows how some Chinese tech giants can build AI models comparable to U.S. ones, “which can be tactically bullish for MSCI China on the back of subdued valuation, light positioning, and recovering earnings cycle,” Louis Luo, head of multi-asset investment solutions, Greater China, abrdn, said in a Feb. 5 note. The MSCI China index includes Hong Kong and mainland-traded stocks. While DeepSeek is not publicly listed, investment analysts expect several Chinese stocks can benefit from local AI development. “Kingdee and Kingsoft Office remain our top names to gain exposure to the AI themes,” Bernstein’s Boris Van and Ting Ming Neo said in a Feb. 5 report. They expect Hong Kong-listed software company Kingdee can benefit due to its large base of small and medium-sized businesses, strong product positioning and subscription model. “The stock is well positioned for a macro recovery should private enterprise budgets resume later in the year, presenting upside to current estimates, with the AI story largely not yet priced in today,” the Bernstein analysts said. They are more cautious in the near term about Shanghai-listed Kingsoft Office, operator of word-processing app WPS, due to uncertainty about how its enterprise AI business can succeed. “Long term AI winner but find the right entry point in 1H,” the analysts said. They rate both stocks outperform. Within China stocks likely to benefit from rising AI adoption, J.P. Morgan China equity strategists also like Kingdee more than Kingsoft Office. “DeepSeek’s low cost and quality AI data infrastructure should help raise the installation and revenue base for AI enabled software applications,” they said in a Feb. 3 note. The firm highlighted Kingdee as a preferred pick. They pointed out that while businesses have not spent much on software due to slow growth, government offices in China have been digitizing data and processes to improve efficiency. The J.P. Morgan China strategists also expect increased availability of AI applications to encourage consumers to buy new smartphones more frequently. Among the publicly-traded Chinese players, they like Hong Kong-listed Xiaomi the best as they expect Lenovo will be more affected by tariffs. The team rates Xiaomi overweight. HSBC analysts on Feb. 6 raised their revenue estimates for Xiaomi partly on expectations of better smartphone and connected home appliance sales. They pointed out that Xiaomi has an in-house AI large model team and strategic cooperation with Kingsoft Cloud and AI startup MiniMax. “With the rise of low-cost models such as DeepSeek-R1 and the gradual maturity of AI computing infrastructures, we believe Xiaomi will benefit as one of the top global edge AI players,” the HSBC analysts said, referring to on-device AI. More interest outside the state sector Chinese stocks still face U.S. tariff uncertainty, and questions remain about how quickly the world’s second-largest economy can grow this year without sufficient support. WisdomTree’s Ren cautioned that China investors might face “very painful” periods due to the barrage of headline-driven volatility. She added that new buyers are likely increasing their allocation from emerging markets rather than U.S. stocks. But there are other indications that the winds have shifted. Interest in China started to pick up after Beijing’s stimulus announcements in late September, Ren pointed out. What’s different now, she said, is that DeepSeek’s latest artificial intelligence breakthroughs are showing innovation coming out of China’s private, non-state owned sector. The WisdomTree China ex-State-Owned Enterprises Fund (CXSE) was up nearly 4% for the year as of Thursday’s close. In contrast, a Bosera ETF for tracking high yielding state-owned enterprise stocks was down more than 3.5% over that time. That’s after state-owned enterprises traded in mainland China outperformed non-state-owned ones for three straight years , according to Allianz Global Investors. — CNBC’s Michael Bloom contributed to this report.