DeepSeek’s breakthrough in artificial intelligence has sparked a significant rally in Chinese markets. This has led to a notable rotation of investor funds out of India stocks and into Chinese equities. The MSCI China Index has surged by 26.5% from its January low.
This marks an 18% increase year-to-date. In contrast, the MSCI India Index has lost over 7% in the same period. “Every time the China market goes up, the India market goes down,” said Thio Siew Hua, managing director and head of equities at Lion Global Investors.
By the end of January, over 50% of funds surveyed by Nomura had reduced their allocations to India. They favored increased exposure to China and Hong Kong stocks instead. Chinese stocks have been buoyed by a tech rally led by DeepSeek’s R1 model.
It has been touted for its superior performance and lower costs compared to established AI players. The Hang Seng Tech Index recently reached its highest level in nearly three years. The index tracks the largest technology firms listed in Hong Kong.
India’s stock market, meanwhile, has been languishing in correction territory. Investors have been rotating away from India due to several factors.
deepseek fuels Chinese tech stock surge
These include a slowdown in the economy and muted near-term earnings expectations. “The re-allocation into China is driven by a stronger narrative on several fronts,” said Alex Smith, head of equities investment specialists for Asia and Emerging Markets at Abrdn. The sentiment has been further supported by other Chinese tech companies like Alibaba.
They have also demonstrated substantial performance improvements. However, despite the optimism, caution is advised when investing in China. “It may be a little too early to say the worst is behind us in terms of seeing a sustained recovery in consumption activity in China,” said Nicole Wong, portfolio manager at Manulife.
Chinese markets continue to face several challenges. These include growing trade tensions, concerns over the financial system, the real estate bubble, and uncertainties surrounding government stimulus measures. James Liu, founder and head of research at Clearnomics, warned that these factors are likely to drive volatility in 2025.
In contrast, opportunities for profit still exist within Indian equities. This is primarily for those looking to capitalize on corrections since the start of the year. Ken Wong, Asia equity portfolio specialist at Eastspring Investments, noted that he is eyeing large-cap companies in the financial, real estate, and banking sectors in India.
This is despite reducing exposure to smaller names. As the landscape of global markets evolves, the shift of investor focus from India to China underscores the dynamic nature of emerging market investments. This is driven by advancements in technology and varying economic conditions.
