DeepSeek’s recent advancements in artificial intelligence have sparked a notable shift in global investment trends, particularly influencing the movement of capital between two major emerging markets: China and India. This shift underscores how technological innovation can rapidly reshape investor sentiment and redirect financial flows. In this case, DeepSeek’s breakthrough has reignited confidence in China’s technology sector, prompting hedge funds and investors to reallocate their investments from India back into China. This rotation marks a significant reversal of the trend that had favored India in recent years, driven by its infrastructure growth and potential as an alternative manufacturing hub to China. With China’s equity markets experiencing a surge in investment, while India faces a significant outflow of funds, the financial landscape in Asia is undergoing a notable transformation.
One of the most striking aspects of this shift is the sheer scale of the capital movements. Over the past month, China’s onshore and offshore equity markets have added more than $1.3 trillion in total value, while India’s market has lost over $720 billion during the same period. This stark contrast highlights the contrasting fortunes of the two nations in the eyes of global investors. The performance of the MSCI China Index further exemplifies this trend, as it is on track to outperform its Indian counterpart for a third consecutive month. This marks the longest streak of outperformance for Chinese equities over Indian ones in two years. The reversal is particularly notable given the optimism that had been building around India’s growth story in recent years, driven by its demographics, infrastructure spending, and potential as a manufacturing hub.
The shift in investor sentiment toward China is closely tied to the growing recognition of its strength in the artificial intelligence (AI) ecosystem. DeepSeek’s advancements have brought China’s tech sector into the spotlight, showcasing its potential to play a pivotal role in the global AI landscape. Portfolio managers like Ken Wong at Eastspring Investments have taken notice, increasingly allocating funds to Chinese tech stocks while scaling back exposure to Indian equities. This reallocation reflects a broader reevaluation of China’s investability, particularly in the technology sector, after a period of investor cautiousness due to regulatory crackdowns on domestic tech giants. The fact that entrepreneurs like Alibaba’s Jack Ma have been invited to meet with Chinese leaders suggests a more supportive environment for tech innovation, further bolstering investor confidence.
The fund flows into China are not solely driven by the AI narrative, however. Expectations of further economic stimulus measures from Beijing also play a significant role in attracting investors. Andrew Swan, head of Asia ex-Japan equities at Man Group, notes that potential policy shifts toward boosting consumption and encouraging savings could provide additional support for China’s economy and markets. This sentiment is reflected in the actions of institutional investors, with many of the largest active Asian equity funds reducing their exposure to Indian equities while increasing their allocations to Chinese stocks. Over the past year, for instance, the Man Asia Ex-Japan Equity fund has raised its China exposure to 40% from 30%, while trimming its India exposure to 18% from 21%. Such reallocations underscore the growing appeal of China on a risk-reward basis, particularly when compared to the current challenges facing India.
Despite the optimism surrounding China’s tech-driven resurgence, not everyone is convinced that the shift is sustainable. India’s long-term growth narrative, driven by its young population, infrastructure development, and expanding middle class, remains compelling for many investors. Morgan Stanley is among the firms arguing that the recent correction in Indian equities may have been overdone, suggesting that the country’s fundamental growth story remains intact. Additionally, concerns over expensive valuations in India have Been partly mitigated by the correction, potentially creating opportunities for long-term investors. At the same time, external factors such as U.S. tariffs on Chinese goods continue to weigh on sentiment, with some investors remaining cautious about China’s outlook due to lingering trade tensions.
Despite these reservations, there is undeniably a renewed sense of optimism surrounding China’s markets. The success of DeepSeek has been a key catalyst, enabling investors to build a case for reengaging with Chinese equities after a period of underperformance. The Hang Seng Tech Index has entered a bull market, and major Chinese tech firms like Alibaba have seen significant gains in market value. Nicole Wong, a portfolio manager at Manulife Investment Management, captures the sentiment succinctly, describing the DeepSeek news as a “well-timed and impactful catalyst” for reentering Chinese markets. With momentum on its side and a growing array of positive developments, China is once again reclaiming its place as a major destination for global capital, challenging India’s recent dominance in emerging market investing.
