Photo by Airam Dato-on
DeepSeek’s advancements in artificial intelligence are fueling a shift of investment funds back into China from India.
Hedge funds have been increasingly investing in Chinese stocks at the highest rate seen in months as optimism about the technology rally driven by DeepSeek is coupled with expectations for further economic stimulus. Meanwhile, India is experiencing an unprecedented outflow of capital due to worries about declining macroeconomic growth, decreasing corporate profits, and high stock valuations.
Over the last month, China’s onshore and offshore equity markets have collectively gained over $1.3 trillion in value as a result of these reallocations, while India’s market has diminished by more than $720 billion. The MSCI China Index is poised to surpass its Indian counterpart for a third consecutive month, marking the longest such period in two years.
DeepSeek has demonstrated “that China indeed possesses companies that are integral to the entire AI ecosystem,” stated Ken Wong, an Asian equity portfolio expert at Eastspring Investments. His firm has been increasing its holdings in Chinese internet companies in recent months while reducing its investments in smaller Indian stocks that had “risen significantly beyond their valuation multiples.”
This shift indicates a reversal from the trend of investing in India observed over the past few years, which had drawn investments away from China. This trend was encouraged by India’s surge in infrastructure spending and its potential as an alternative manufacturing center to China. Additionally, India has been perceived as a relatively safe option amid Donald Trump’s tariff initiatives.
China appears to be regaining its prior attractiveness as investors reassess its investability, particularly in the tech sector. After unsettling investors with corporate crackdowns recently, Beijing might actually support the emerging AI theme, as shown by the news that entrepreneurs, including Alibaba Group Holding Ltd. co-founder Jack Ma, have been invited to meet with the country’s top officials.
Developments related to DeepSeek are expected to contribute positively to China’s economy and markets, providing extended support, noted Vivek Dhawan, a fund manager at Candriam. “When you consider all the elements, China appears more appealing than India in the current environment on a risk-reward basis.”
The valuation gap further enhances China’s appeal. The MSCI China Index is currently valued at roughly 11 times forward earnings projections, whereas the MSCI India Index stands at approximately 21 times.
A review of Bloomberg data regarding regional investments by several major active Asian equity funds indicates that many are decreasing their investments in Indian stocks while increasing their stakes in Chinese equities recently.
Although DeepSeek has contributed to boosting investments in China, potential announcements regarding additional Chinese stimulus measures are also significant, as stated by Andrew Swan, who oversees Asia ex-Japan equities at Man Group.
Swan mentioned, “We believe that policy will now focus on consumption and specifically aim to motivate the high savings rate to be utilized.” Over the past year, the Man Asia Ex-Japan Equity fund he manages has raised its investment in China from 30 percent to 40 percent, while simultaneously reducing its investment in India from 21 percent to 18 percent.
A complete turnaround in fund movements is improbable, with Indian stock advocates, including Morgan Stanley, suggesting that the recent downturn may have been excessive and that the country’s long-term growth narrative remains solid.
At the same time, the additional 10 percent tariffs imposed on China by Trump have reaffirmed Amundi SA’s neutral perspective on Chinese stocks, as noted by Asia senior investment strategist Aidan Yao. “Even though a ceasefire could occur if both parties make progress in trade discussions, the external environment will continue to be unpredictable and difficult for China in the foreseeable future.”
Additionally, there is doubt among traders who have experienced losses from previous unsuccessful rallies in China. Some have cited overcrowded trading and rising valuations as reasons for caution.
Helen Zhu, the chief investment officer at Nan Fung Trinity HK Ltd., expresses doubt about the replicability of DeepSeek’s AI achievements. “Ultimately, the potential monetization opportunities over the medium to long term remain uncertain,” she stated.
However, there is a noticeable excitement in the markets lately indicating that “China’s back.” Positive developments are accumulating, with Alibaba increasing its market value by $100 billion in the last five weeks and the Hang Seng Tech Index entering a bull market.
“DeepSeek’s announcement served as a timely and significant catalyst that allowed market participants to justify reentering Chinese markets,” remarked Nicole Wong, a portfolio manager at Manulife Investment Management. “From a tactical perspective, we believe capitalizing on this momentum is a sensible strategy.”
