Having driven the lion’s share of their asset growth over the last decade, Australian super funds are starting to water down their penchant for United States tech stocks in favour of higher allocations to listed equities in China that have been on a tear over the last year.
However, super funds are by no means alone in their growing attraction to listed Chinese stocks, with the Shanghai Exchange Composite Index (SSE) – one of China’s three stock exchanges – rising to decade highs in August in the wake of global investors dumping U.S bonds.
What’s also driving global investor diaspora out of the U.S. equities is the outperformance of Chinese equities at a ratio of two to one, which mirrors Beijing’s interventions to support the economy at the start of 2024.
Bottom line is, with Chinese equities perceived to be offering better value than their U.S. counterparts, they are becoming increasingly hard for global investors to ignore.
After seriously underperforming U.S, Asia, and Europe benchmarks over the past decade, fund managers in China are now hoping there’s sufficient upside in the current rally – bolstered by AI and Chinese government stimulus – for the SSE to potentially retrace November 2007 highs when it reached 5,777 points.
Don’t underestimate China’s role in AI
According to Louis-Vincent Gave, founder of the Hong Kong-based research and financial service firm Gavekal Research, China is becoming truly investable in unprecedented ways and points to government efforts to reduce overcapacity and intense competition among domestic companies via regulation and policies like production caps.
Despite the nation’s real estate bust, Gave doesn’t expect China to face a “lost decade,” as Japan did in the 1990s following the collapse of an asset-price bubble.
He also reminds investors that, as China is the only major economy not grappling with inflation, its central bank has plenty of cushion to put money to work in the economy - most likely in domestic stocks.
As the DeepSeek scare at the start of 2025 made abundantly clear, Gave also warns investors not to discount China’s role in the AI revolution.
“Markets currently assume that US companies will dominate AI just as they did the smartphone era, and that it will be equally profitable for them,” said Gave.
“That may hold true if computing power proves the key bottleneck. But if the real constraint is access to cheap, abundant electricity, China could emerge as a far bigger player than markets now anticipate.”
Diversification and superior returns
Meantime, the renewed interest super funds have in listed Chinese equities coincides with their allocations to all international assets exceeding 50% for the first time.
According to the latest NAB Super Insights report, unprecedented exposure to international assets highlights the quest by super funds for diversification and superior risk-adjusted returns.
NAB’s research suggests super fund interest in international assets is far from exhausted, with 63% of respondents expecting to increase their international allocations over the next two years.
But despite their growing appetite for international allocations, super funds have registered growing ambivalence to U.S. tech stocks, with 53% taking a neutral view on the sector over the next two years.
“The oligopolistic nature of U.S. mega tech ensures they should remain attractive, in the near term; however, we see them as currently overvalued and therefore are owning less,” said one fund in the survey, while another said U.S. tech stocks were “overvalued with tariff headwinds”.
Emerging markets and Japan
Meantime, while funds are now considering higher allocations to listed equities in China and emerging markets, they also want more Japanese and Indian equities, and European private equity and unlisted infrastructure.
While frontier markets - EM countries with less developed capital markets - are still considered “a bridge too far” for most super funds, just under a fifth (17%) of survey respondents, mostly from the medium and large fund segment, said they had invested or were considering investing in them.
While potential opportunities in fixed income are in Central and Eastern Europe, in listed equities they’re in Kazakhstan, the Philippines and Peru.
AI and digitisation still top thematics
Interestingly, while super funds have hit their limit on U.S. tech stocks – which global investors have been rotating out of due to valuation fears - AI and digitalisation are still the top themes influencing their investment decisions.
Super funds are also closely following inflation/disinflation thematics and opportunities in essential infrastructure.
“Also notable was that among funds specifying “other” thematics, two cited liquidity management, and geopolitics and deglobalisation also rated mentions,” the report says.
“Demographics, re-militarisation or re-industrialisation, and opportunities in healthcare or pharmaceuticals, were the thematics which polled poorly.”
The rotation in big equity bets was evident on the S&P 500 last week, with the S&P 500's healthcare sector up 5.2% in November through to last Friday, according to FactSet, while energy stocks were 4% higher.
By comparison, the IT sector was down 3.8% on the month to date.
Further corrections ahead
However, concerns of an AI bubble are by no means confined to the “Magnificent Seven” — Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, and Tesla — which now collectively command a market capitalisation greater than the entire Chinese economy.
European shares fell on Tuesday, with those in Germany nearing a five-month low as a broad risk-off mood gripped global markets.
What’s keeping investors awake at night on the other side of the Atlantic mirrors those in the U.S: There are overarching concerns around the overvalued tech sector amid diminishing prospects of an imminent interest rate cut from the U.S. Federal Reserve.
Reflecting investor nervousness, a volatility gauge (V2TX) jumped 2.7 points to 22.89, its highest level since the U.S. regional bank sell-off in mid-October.
"A higher volatility means higher anxiety throughout the market" reflecting "doubts regarding AI valuations, what the Fed might do next, and the uncertainty around the U.S. economic data and around the long-term borrowing costs," said Ipek Ozkardeskaya, senior market analyst at Swissquote Bank.
"The higher the volatility, the higher the chances of a deeper market correction."
