DeepSeek has stoked a rotation out of India stocks into Chinese equities — but experts advise caution

DeepSeek’s breakthrough in artificial intelligence has boosted investor sentiment around China stocks, with a gauge of the country’s onshore as well as offshore shares soaring over 26% since its January low.

The surge in Chinese equities comes at a time when Indian stocks have been languishing in correction territory, with experts pointing to a rotation away from India into China.

“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.

China’s CSI300 had given negative returns for three straight years before logging strong gains last year, while Indian equities have seen secular growth for the past nine years, but returns in 2024 were much lower than the year before.

“You need to sell something to fund something new, so that’s what’s happening, especially with the disappointments that we’ve seen in India,” she told CNBC.

Chinese stocks, led by a tech rally, have been on a tear since the release of DeepSeek’s R1 model in January as it challenged the U.S.-led AI ecosystem, claiming superior performance at much lower costs than the more established AI players.

The Hang Seng Tech Index, which tracks the 30 biggest technology firms listed in Hong Kong on Friday hit its highest in nearly three years.

Meanwhile, the MSCI China Index — up 26.5% so far from its January low — has gained nearly 18% this year, while the MSCI India index has lost over 7% year to date.

The re-allocation into China is driven by a stronger narrative on several fronts, said Abrdn’s head of equities investment specialists for Asia and EM, Alex Smith.

“We saw strong [China] market moves to the upside following the launch of Deepseek,” Smith told CNBC. 

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

India’s economy has been grappling with a slowdown, the stock market has corrected sharply in recent months and near-term earnings expectations remain muted, Smith said.

India’s GDP grew by 5.4% in the quarter ended September, reflecting the weakest growth in the last seven quarters. At the start of the year, the government lowered its economic growth projection for the fiscal year ending in March to 6.4%, the lowest in four years.

By the end of January, 33% of large global EM funds surveyed by Nomura were “Overweight” China and Hong Kong equities, up from 26% in December. Conversely, there has been a 6% increase in global EM funds becoming “Underweight” on India equities, Nomura’s statistics showed. 

Over 50% of funds Nomura surveyed said they had cut their allocations to India by the end of January, while allocations to China and Hong Kong stocks were increased.

Manulife’s portfolio manager Nicole Wong told CNBC that she took profits on her India allocations in January, while going “Overweight” on China and Hong Kong’s equity markets, in particular the Chinese technology sector.

Momentum in the India equity markets has somewhat reversed now, after investors saw India stocks as a preferred place to park their money within the emerging markets space for much of 2024, she added.

In the years that followed the pandemic, many investors moved out of China, which saw money move toward countries such as India, said Thio.

China’s CSI 300 saw yearly losses of over 5%, nearly 22% and over 11%, in 2021, 2022 and 2023, respectively. Conversely, India’s Nifty 50 saw yearly gains of over 24%, 4%, 20%.

The current rotation of flows is a meaningful one, given how investors are now firmly in President Donald Trump’s second era and will most likely continue to see more aggressive stimulus measures coming out of China given tariff threats, said Abrdn’s Smith.

While the optimism around Chinese markets has increased, the country’s economy has been facing several headwinds. This calls for a cautionary approach, experts suggest.

“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 Manulife’s Wong.

It is important to note that Chinese markets are still relatively volatile, said James Liu, founder and head of research at Clearnomics.

“Factors such as a growing trade war, recurring concerns over the Chinese financial system, the real estate bubble, and uncertainty around government stimulus will likely drive volatility in 2025,” he said.

In Indian equities, there are still opportunities for profit-taking given the corrections since the start of the year, said Ken Wong, Asia equity portfolio specialist from Eastspring Investments.

Wong, who allocated 51% of his portfolio to China and 46% in India, said that he is looking to cut exposure to small- and mid-cap names in India but eyeing some large-cap companies, namely the financial, real estate and banking sectors.