DeepSeek’s AI Boosts China Stocks, India Sees Market Decline

China's recent advancements in artificial intelligence have fueled a significant rally in its stock market, with indices tracking onshore and offshore equities surging by over 26 per cent since hitting their lowest point in January. This sharp rise has coincided with a correction in Indian markets, where investors are reallocating funds towards China.

Market analysts attribute the shift to capital rotation, noting that as Chinese equities gain momentum, Indian stocks have experienced a decline. Thio Siew Hua, Managing Director and Head of Equities at Lion Global Investors, pointed out that such an inverse correlation between the two markets is becoming more pronounced.

China’s CSI 300 index had posted negative returns for three consecutive years before rebounding in 2024. In contrast, India’s equity market saw sustained growth over the past nine years, but returns in 2024 have been considerably lower compared to the previous year.

The surge in Chinese stocks is being driven by a wave of optimism in the technology sector, sparked by the release of DeepSeek’s R1 model. The AI breakthrough has bolstered China’s competitive position against established players in the global AI landscape, offering performance advantages at reduced costs. The Hang Seng Tech Index, which tracks 30 major technology firms listed in Hong Kong, recently reached its highest level in nearly three years.

Meanwhile, the MSCI China Index has advanced 26.5 per cent from its January low and registered an 18% gain this year. Conversely, the MSCI India Index has fallen by over 7 per cent year to date, reflecting the broader reallocation of funds into China.

Alex Smith, Head of Equities Investment Specialists for Asia and Emerging Markets at Abrdn, highlighted that the rapid rise of DeepSeek has played a pivotal role in drawing investor attention back to China’s technology sector. Homegrown AI models such as DeepSeek’s R1 and Alibaba’s Qwen 2.5 are reinforcing China's AI capabilities while lowering operational costs, increasing the appeal of Chinese equities.

India’s stock market has faced downward pressure as economic growth projections have weakened. The country’s GDP expanded by 5.4 per cent in the September quarter, marking its slowest pace in seven quarters. The government has revised its full-year growth forecast to 6.4 per cent for the fiscal year ending March, the lowest in four years.

Investor sentiment has also shifted, with global emerging market funds increasing their allocations to China and Hong Kong while reducing exposure to India. Nomura’s latest survey found that by the end of January, 33 per cent of large global EM funds were overweight on Chinese equities, up from 26% the previous month. Meanwhile, funds underweight on Indian equities rose by 6 per cent.

Over half of the surveyed funds reported reducing their India exposure while increasing investments in China and Hong Kong stocks. Nicole Wong, a portfolio manager at Manulife, stated that she took profits on India allocations in January while raising exposure to Chinese technology stocks.

India’s stock market has seen a reversal in momentum after emerging as a preferred investment destination within emerging markets for much of 2024. In contrast, China, which faced years of capital outflows, is now witnessing a reallocation of funds back into its equities.

China’s CSI 300 index recorded losses of 5 per cent, 22 per cent, and 11 per cent in 2021, 2022, and 2023, respectively. During the same period, India’s Nifty 50 index gained 24 per cent, 4 per cent, and 20 per cent. However, with investor sentiment improving towards China, the flow of funds has shifted accordingly.

Abrdn’s Smith noted that the current market rotation is significant, with investors anticipating aggressive stimulus measures from China, particularly in light of U.S. trade policy uncertainties.

Despite the positive outlook for Chinese equities, experts caution that underlying risks remain. Manulife’s Wong emphasized that a sustained recovery in China’s consumption activity is yet to be confirmed. Additionally, ongoing concerns over trade tensions, financial system stability, and the real estate sector could contribute to market volatility in 2025.

For Indian markets, investment opportunities remain, particularly in large-cap stocks in financial, real estate, and banking sectors, according to Ken Wong, Asia Equity Portfolio Specialist at Eastspring Investments. He noted that while he is reducing exposure to mid- and small-cap Indian stocks, certain large-cap segments still present value.