DeepSeek one year on: separating fundamentals from noise

China is experiencing renewed momentum in the artificial intelligence sector and, one year on from the launch of the DeepSeek model, investors need to assess the implications; does the momentum reflect a cyclical surge in enthusiasm, or is it a deeper structural shift?

Market performance provides useful context, but it does not answer those questions on its own. Over 2025, the MSCI China Index rose strongly, outperforming both US equities and global markets. Innovation-led themes, particularly technology and AI, have been central to that rebound following the announcement of DeepSeek’s AI model early in the year. Momentum has continued, reflected in several Chinese AI and technology listings in Hong Kong towards the end of 2025, which attracted strong investor interest.

The more relevant issue is whether this strength reflects improving fundamentals, or whether it largely represents a sentiment driven re-rating. In assessing this surge, it is also important to consider the initial sentiment backdrop. Valuations were extremely depressed 12 to 18 months ago amid questions around China’s “investability”, so what has changed?

Past performance is not a reliable indicator of future returns.
Source: Morningstar as at 31.12.2025, bid-bid, net income reinvested.
©2026 Morningstar Inc. All rights reserved. The MSCI China (N) Index is a comparative index of the investment trust.

What has changed: capability, cost and economics

Since DeepSeek, domestic AI capability in China has continued to improve across a broader range of applied use cases and performance gaps with leading global peers appear to have narrowed. At the same time, Chinese AI models are mostly “open-source” and often being deployed at meaningfully lower cost, with more competitive token pricing supporting broader adoption across enterprise and consumer applications.

Much of the market narrative, however, remains concentrated on a small number of headline names. That focus risks understating the breadth of the opportunity and undermining the structural progress being made across China’s technology landscape.

What has not changed: innovation beyond a single moment

The success of DeepSeek should be viewed not as an isolated event, but as the outcome of sustained investment and a broader trend of innovation in China. Private Chinese corporates have increased research and development spending by over 20% per annum over the past 15 years, steadily improving competitiveness across a wide range of industries. This depth of investment is increasingly visible in global innovation metrics and early commercial outcomes.

Progress extends well beyond large language models into areas such as robotics, autonomous driving, next-generation mobility and advanced manufacturing. One example within the Trust is Hesai Group, a leading supplier of LiDAR (light detection and ranging) sensor solutions. The company’s technologies support advanced perception capabilities across a range of applications, including autonomous vehicles, industrial automation, and robotics. We see significant long-term potential driven by increasing adoption of LiDAR in the automotive sector, as well as expanding use cases in industrial and humanoid robotics.

From enthusiasm to fundamentals

One year on from the DeepSeek moment, the pace of innovation in China shows no sign of slowing. In an environment where sentiment can move quickly, dispersion between winners and losers is increasing, reinforcing the importance of remaining disciplined in choosing high-quality companies. For the Trust, opportunities are assessed on a company-by-company basis, with a focus on long-term growth opportunity, competitive positioning, returns on capital, and execution capability.