What is the foreign perspective on the Chinese and global economies? Following a rally in the A-share market, have these views shifted? Amid the AI wave, how do they assess the opportunities and risks across various sectors? Jerome Lu, Investment Strategist for Greater China at BlackRock, recently shared his latest insights at the BlackRock China 2026 Investment Outlook forum.
AI is potentially on the brink of a new, historic wave of infrastructure development. Confronting the rapid advancement of AI, Lu believes this wave could be significant. Investment in the AI sector is substantial, exerting a notable influence on the structure of the global economy. The structure of the US economy has already shifted from being primarily consumption-driven to a dual engine of AI and consumption.
Lu suggests that the proportion of AI investment in the US economy is already comparable in impact to China's "four-trillion-yuan" stimulus phase in 2008. The concentrated, large-scale investment driven by AI has a very pronounced effect on the total economic output and growth rates of the relevant economies.
He also pointed out that the most contentious and divisive aspects of the AI supply chain currently are the long-term commercial viability of AI and its impact on employment. The latter is increasingly becoming a major topic of discussion among investors.
Global central banks are expected to maintain a bias towards monetary easing. Lu also believes that US monetary policy will likely remain dovish in the future. Given current market conditions, two interest rate cuts this year seem reasonable. As the labor substitution effect of AI becomes more evident, the Federal Reserve's subsequent focus is expected to shift more towards employment risks than inflation.
He also mentioned the recent sharp decline in gold prices, which he interprets as the market voting for central bank independence. The previous rise in gold was based on concerns about a decline in US dollar assets and uncontrolled debt. The nomination of a new Fed Chair has partially alleviated fears that the central bank might be constrained by government debt, becoming a factor triggering the drop in gold prices.
The Chinese economy is projected to maintain robust growth. Lu also holds the view that the Chinese economy will continue to hold a leading global position through 2026, with export growth being the most critical variable.
He stated that the Chinese economy plays a vital and significant role in the global economic landscape. A dual-track effect is prominent in China's economy: manufacturing and exports are strong, while the property market continues to decline, and consumption remains lukewarm. This pattern is likely to persist through this year. Maintaining such performance is no small feat, especially in exports, where the strength of growth has surpassed the expectations of most global investors.
He anticipates that corporate profits will bottom out in the second half of 2024 and gradually rebound. The Producer Price Index (PPI) is expected to recover further this year. As China remains a manufacturing-oriented economy, a PPI recovery directly aids corporate profitability. Examining profit revisions across A-share sectors reveals significant improvements in traditional industries, including raw materials, finance, and industrials. This recovery is not expected to be a rapid V-shaped rebound but a more fundamentally sound uptrend, presenting clear investment opportunities within this trend.
Power supply emerges as a new constraint for tech stocks. Lu also believes that, within AI investment, the sector with the highest certainty is actually power.
He identifies two fundamental constraints for AI investment: the availability of sufficient capital and the availability of sufficient power.
Regarding capital, profit growth in the tech industry fully supports stock price increases, and there is ample capital to continue high-speed investment, with healthy balance sheets enabling fundraising from capital markets.
However, the situation regarding power supply varies greatly globally. Forecasts indicate that AI's power consumption will double between now and 2030. Lu argues that it is impossible for the US to build enough new power generation capacity to meet this demand within four or five years. Therefore, power shortages in the US are highly probable; it's merely a question of when.
Consequently, current overseas investment in power is significantly boosting global supply chains, with many Chinese companies benefiting. Chinese-manufactured power equipment is undoubtedly the strongest in the world, encompassing both new energy and traditional energy sectors. In a scenario of power shortages, procuring Chinese-made power equipment becomes unavoidable, making power equipment and technology a high-conviction investment direction derived from the AI trend.
Healthcare is an overlooked force of innovation. Lu further contends that healthcare is a sector and investment direction worthy of global attention. Healthcare is currently an undervalued industry that hasn't seen significant gains in recent years. However, AI is also providing impetus to this sector, both in new drug development and medical services. Healthcare acts as a stabilizer; when investment is heavily concentrated on tech themes, a steadily developing sector like healthcare, also propelled by AI, represents a rare investment opportunity.
Regarding consumption, the US exhibits distinct structural characteristics. The generation with the strongest consumption power is the Baby Boomers, those born between 1945 and 1965. They benefited from higher labor incomes during their working years. Following the implementation of the US Social Security Act in 1965, they also gained pension security. Their work income, pension investment accumulation, and property investments have endowed them with strong consumption capacity, with healthcare and wellness products being a primary expenditure for the elderly.