DeepSeek’s breakthrough in AI has boosted investor sentiment in Chinese stocks, with an index measuring Chinese onshore and offshore shares surging more than 26% since a January low.

The surge in Chinese stocks comes as Indian stocks are in correction territory, with experts noting that money is moving from India to China.

“Whenever the Chinese market goes up, the Indian market goes down,” said Thio Siew Hua, managing director and head of equities at Lion Capital.

China’s CSI 300 index had posted negative returns for three years before last year’s strong gains, while Indian stocks have been long-term growth for the past nine years, but returns in 2024 are much lower than the year before.

“You need to sell something to fund new things, and that’s what’s happening, especially as we’re seeing disappointment in India,” she told CNBC.

China’s stock market has surged on the back of tech stocks since the release of DeepSeek’s R1 model in January, challenging the U.S.-dominated AI ecosystem with claims of superior performance at a fraction of the cost of established AI companies.

The Hang Seng Tech Index, which tracks the 30 largest tech companies listed in Hong Kong, hit its highest level in nearly three years on Friday.

Meanwhile, the MSCI China Index has risen 26.5% so far this year and nearly 18% from its January low, while the MSCI India Index has fallen more than 7% so far this year.

Alex Smith, head of equity investment specialists for Asia and emerging markets at Abrdn, said the reallocation to China was driven by a stronger narrative on multiple fronts.

“We saw strong upside in the Chinese market after Deepseek launched,” Smith told CNBC.

The rise of Deepseek has boosted investor interest in Chinese tech companies. Smith said Chinese local models such as Deepseek’s R1 and Alibaba’s Qwen 2.5 have demonstrated the ability of Chinese companies to continuously improve performance while reducing inference costs.

India’s appeal is waning

Smith said the Indian economy has been struggling with slowing growth, the stock market has corrected sharply in recent months, and short-term earnings expectations remain subdued.

India’s GDP grew 5.4% in the September quarter, the slowest growth in nearly seven quarters. Earlier this year, the Indian government lowered its economic growth forecast for the fiscal year ending in March to 6.4%, the lowest in four years.

As of the end of January, 33% of large global emerging market funds surveyed by Nomura Securities were “overweight” Chinese and Hong Kong stocks, up from 26% in December. On the contrary, Nomura Securities’ statistics show that the proportion of global emerging market funds “underweight” Indian stocks increased by 6%.

More than 50% of the funds surveyed by Nomura said they cut their allocations to India by the end of January, while increasing their allocations to Chinese and Hong Kong stocks.

Nicole Wong, a portfolio manager at Manulife, told CNBC that she took profits from her Indian portfolio in January, while giving an “overweight” rating to the Chinese and Hong Kong stock markets, especially the Chinese technology sector.

She added that the momentum in Indian stocks has now reversed after investors viewed Indian stocks as the preferred place to invest in emerging markets for most of 2024.

In the years after the outbreak, many investors pulled out of China and funds flowed to countries such as India, said Thio.

China’s CSI 300 Index has seen annual declines of more than 5%, nearly 22%, and more than 11% in 2021, 2022, and 2023, respectively. In contrast, India’s Nifty 50 Index has seen annual gains of more than 24%, 4%, and 20%, respectively.

Abrdn’s Smith said the current rotation of capital flows is significant given that investors are now firmly in the second era of President Trump and are likely to continue to see more aggressive stimulus measures from China amid the threat of tariffs.

Despite the increased optimism about the Chinese market, the country’s economy still faces many headwinds. Experts suggest that this requires a cautious approach.

Manulife’s Mr Huang said: “From the perspective of the continued recovery of consumer activity in China, it may be too early to say that the worst is over.”

It is worth noting that the Chinese market is still relatively volatile, said James Liu, founder and head of research at Clearnomics.
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