China’s equity market is staging a major comeback, fuelled by a shift in investor sentiment driven by DeepSeek’s artificial intelligence advancements.
Since hitting a low in January, the MSCI China Index has surged 26.5%, propelled by a renewed focus on the country’s tech sector.
In contrast, Indian stocks have lost their momentum, with the MSCI India Index declining over 7% year to date.
This reversal marks a sharp departure from the past three years, during which China’s stock market suffered consecutive declines while Indian equities attracted significant foreign inflows.
Now, a growing number of global funds are reallocating capital, favoring China’s tech resurgence over India’s slowing economic momentum.
DeepSeek’s R1 model, which challenges the dominance of US-led AI firms, has played a pivotal role in this shift.
Chinese equities rebound as India loses steam
The Hang Seng Tech Index, which tracks Hong Kong’s largest technology firms, has surged to its highest level in nearly three years.
Chinese AI firms such as DeepSeek and Alibaba’s Qwen 2.5 are gaining traction, demonstrating significant improvements in AI efficiency and cost-effectiveness.
Investors, who had previously shunned China due to regulatory concerns, are now taking a fresh look at the country’s growth potential.
Meanwhile, Indian stocks have entered correction territory, with large institutional investors taking profits.
India’s GDP growth slowed to 5.4% in the September quarter, the weakest in seven quarters, and the government recently lowered its economic growth projection to 6.4% for the fiscal year ending March—its lowest in four years.
This downturn has prompted major portfolio adjustments. Nomura’s latest survey of emerging market (EM) funds showed a notable shift: 33% of large EM funds were “Overweight” on China and Hong Kong equities by the end of January, up from 26% in December.
At the same time, there was a 6% increase in EM funds becoming “Underweight” on India. More than 50% of surveyed funds reported cutting their allocations to Indian stocks.
Capital rotation driven by AI growth and policy shifts
DeepSeek’s AI advancements have reshaped investor sentiment in China, positioning the country as a serious competitor in the global tech landscape.
The success of its R1 model has intensified interest in Chinese tech firms, while policy support from Beijing has further strengthened market confidence.
This shift is particularly significant given China’s stock market struggles in recent years, with the CSI 300 posting losses of 5%, 22%, and 11% in 2021, 2022, and 2023, respectively.
In contrast, India’s Nifty 50 saw gains of 24%, 4%, and 20% over the same period.
The past three years saw capital flows favoring India as investors sought alternatives to China amid geopolitical tensions and regulatory uncertainties. However, the tide appears to be turning.
Adding to the shift is the political climate in the US. With Donald Trump now in his second term, investors anticipate stronger economic measures from Beijing to counter potential trade restrictions.
Market participants expect China to roll out stimulus policies to support its economy, further boosting investor confidence in Chinese stocks.
Will China sustain its rally?
While the capital rotation towards China is gaining momentum, concerns remain over the sustainability of this shift. China’s economy continues to face challenges, including weak domestic consumption and a sluggish property sector.
Some investors are cautious about whether the AI-fuelled rally can translate into long-term gains for the broader market.
James Liu, founder of Clearnomics, noted that despite the recent optimism, Chinese markets remain volatile. Investors are balancing the excitement over AI innovation with concerns about broader economic stability.
Similarly, while the Indian market has seen near-term weakness, many still view India as a strong long-term growth story, particularly as global firms diversify supply chains away from China.
For now, DeepSeek’s rise has reignited confidence in China’s tech sector, accelerating the reallocation of funds from India.
Whether this trend continues will depend on the resilience of China’s economic recovery and the policy response from both Beijing and Washington in the months ahead.
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