Time is on China's side in the chip war - here's the Jefferies trade
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Tech investors will benefit from continued belief in genuine beneficiaries of the AI story, according to Jefferies.
Reports of restrictions by the U.S. on AI chip shipments to China underscore the argument that "Washington has effectively declared economic war against China despite recent trendy talk of 'de-risking' as opposed to 'decoupling,'" Christopher Wood, global head of equity strategy, wrote in his Greed & Fear note.
Nvidia's (NASDAQ:NVDA) performance after the report of restrictions is a testimony to the resilience of the AI supply chain story, Wood wrote.
And "the later the new planned measures are implemented the more precious time Chinese companies have to load up on chips which they will take full advantage of to stock up on precious inventory," he said. 
There is a huge "amount of A800 series so-called 'work around chips' which Nvidia has been selling to China in recent months to get around the US restrictions," he noted. "Remember that Nvidia was restricted from selling its advanced H100 and A100 chips to China and so reconfigured the H100 to comply with the US rules announced last September. The H100 series is reportedly only sourced from TSMC (TSM). Meanwhile it is estimated that Nvidia currently generates more than 20% of its revenues from China (including Hong Kong)."
"Meanwhile the other point is how effectively the US restrictions can be enforced," he said, noting "a recent Reuters article on the underground market for high-end Nvidia chips in Shenzhen where A100 chips are reportedly being sold at US$20,000 a piece or double the normal price. Volume is an issue but the point is that the sanctions can be circumvented for smaller batch transactions."
"So the trade remains ...to be long everything genuinely geared into AI and to be short everything that is not, most particularly if it has been bought in recent weeks as a presumed AI beneficiary on a catch-up-with Nvidia," Wood said.
"Given that the AI servers are apparently more than ten times the price of regular servers, the so-called
'hyperscalers' face a choice," Wood added. "Either they increase capex significantly to increase their AI capacity or they have to slash spending on regular servers."
"This is why it makes far more sense to own Nvidia than the likes of Intel (INTC) or AMD (AMD). On a related point, while the AI story remains super hot, there remains no sign of the long predicted pick up in traditional tech, be it smartphones or personal computers. While the clear risk is now of a greater than forecast downturn in the traditional server market."
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