Why Chinese Stocks Alibaba, Futu Holdings, and Tencent Shook Off Inflation Concerns and Are Rising Today

Despite a hotter-than-expected inflation report this morning, Chinese tech stocks shook off the bad news and marched higher. The beaten-down sector continues to advance since the emergence of China's DeepSeek artificial intelligence (AI) chatbot.

Shares of the large search and e-commerce company Alibaba (NYSE: BABA) had risen 4.4% as of 11:34 a.m. ET today. Meanwhile, shares of the digital finance company Futu Holdings (NASDAQ: FUTU) had surged 8.4%, and shares of the large tech and videogame company Tencent Holdings (OTC: TCEHY) were up 3.5%.

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Alibaba forms big potential partnership

After January's inflation data came in above estimates, most major market indexes sold off as investors further doubted whether the Federal Reserve would be able to cut interest rates more this year with inflation still well above the Fed's preferred 2% target.

The emergence of DeepSeek and the potential for AI language models to be built more efficiently has some investors taking another look at Chinese tech stocks, which have performed well as of late. The Hang Seng Index has rocketed nearly 16% over the last month despite continued struggles in China's economy from deflationary pressure and an ailing property sector.

"China has established a stronger presence in AI-powered applications," JPMorgan Chase strategists wrote in a report on Tuesday. "The combination of increasing AI adoption and relatively low valuations positions Chinese tech for potential outperformance."

Alibaba rose today on media reports that the consumer tech giant Apple has tapped Alibaba to bring more AI features to iPhone users in China. The Information first reported the news. The move will reportedly bring more AI functionality that Chinese users specifically want but also in a way that's compliant with China's strict AI doctrine. The move will also likely make the iPhone more competitive against companies like Huawei and Xiaomi. It's also a testament to Alibaba's AI capabilities because Apple reportedly considered technology and AI models from several other large Chinese tech companies.

Futu also surged after analysts at Bank of America reiterated a buy on the stock yesterday and upped their price target from $108 to $129. Bank of America expects the online financial platform to see a significant 30% quarterly increase in new paying clients, while total client assets are projected to rise by 7%. Strong asset inflows and the ability to maintain a gross profit margin of nearly 93% have made analysts bullish.

I'm not seeing anything specific about Tencent, but as one of the largest Chinese tech companies specializing in content and video gaming, it's not surprising that it's joining in on the rally. More efficient AI would be a big deal for the company, especially as the U.S. continues to contemplate further chip restrictions.

Advantages of cheaper valuations

Because of the country's economic struggles, Chinese tech stocks have not enjoyed the same run as U.S. stocks. But many of these tech companies are large, highly innovative, and can grow earnings nicely, all while trading at cheaper valuations. The advantage of cheaper valuations is that they can get going quickly on any good news, which is why many investors are starting to look internationally as U.S. valuations remain elevated.

Alibaba, Futu, and Tencent all have strong potential. However, due to economic struggles and the Chinese government's influence, they are likely to be more volatile, so investors need to be aware of this and have the stomach to weather more erratic moves.

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Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, JPMorgan Chase, and Tencent. The Motley Fool recommends Alibaba Group and Xiaomi. The Motley Fool has a disclosure policy.