In a major shift within the global emerging markets landscape, China’s equities are experiencing a notable rally, fueled by advancements in artificial intelligence from the revolutionary DeepSeek. On the other hand, India, once a preferred choice for investors, has seen its allure diminish amidst economic challenges and sluggish market performance.
China’s Market Surge
The MSCI China Index has surged by 26.5% since its January 2025 low, posting an impressive 18% year-to-date gain. This growth comes as Chinese tech companies ride the wave of excitement surrounding DeepSeek’s R1 AI model, launched earlier this year. The R1 model has set a new benchmark in artificial intelligence, claiming to outperform U.S.-led AI systems in performance and cost efficiency.
The rise of DeepSeek has bolstered investor confidence in China’s tech sector, with the Hang Seng Tech Index reaching its highest level in nearly three years. DeepSeek’s success has also highlighted the growing capabilities of Chinese companies in the AI space, alongside Alibaba’s Qwen 2.5 model, which has further demonstrated China’s ability to innovate rapidly.
Alex Smith, head of equities investment specialists for Asia and EM at Abrdn, noted, “We saw strong market moves to the upside following the launch of DeepSeek. The narrative around China is stronger than ever, especially with the recent tech rally.”
India’s Waning Appeal
In contrast, India’s markets have been in correction territory. The MSCI India Index has dropped by over 7% year-to-date, reflecting investor concerns about the country’s slowing economic growth and muted earnings expectations.
India’s GDP grew by 5.4% in the quarter ending September 2024, marking its weakest growth in seven quarters. The government has reduced its economic growth projection for the fiscal year ending in March 2025 to 6.4%, the lowest in four years. These economic challenges, combined with a lack of near-term catalysts, have prompted investors to reduce their exposure to Indian equities.
Nomura’s survey of global emerging market funds revealed that over 50% of funds had cut their allocations to India by January 2025, redirecting investments to China and Hong Kong. Nicole Wong, a portfolio manager at Manulife, echoed this sentiment, stating, “Momentum in India’s equity markets has reversed. Investors are taking profits and reallocating to Chinese equities, particularly in the tech sector.”
A Shift in Investor Sentiment
The rotation of funds from India to China represents a significant shift in investor sentiment. Over the past three years, China’s markets had struggled, with the CSI 300 Index registering consecutive yearly losses in 2021 (-5%), 2022 (-22%), and 2023 (-11%). Meanwhile, India’s markets had enjoyed a period of secular growth, with the Nifty 50 Index posting gains of 24%, 4%, and 20% in the same period.
However, the tide appears to have turned in favor of China. Analysts attribute this to a combination of factors, including the transformative impact of DeepSeek, improving market conditions in China, and the relative underperformance of Indian equities.
Thio Siew Hua, managing director and head of equities at Lion Global Investors, remarked, “Every time the China market goes up, the India market goes down. You need to sell something to fund something new, and that’s what we’re seeing now, especially with the disappointments in India.”
Caution Amid Optimism
Despite the optimism surrounding Chinese equities, experts urge caution. James Liu, founder and head of research at Clearnomics, highlighted several risks that could impact China’s markets in 2025, including trade tensions, financial system concerns, and uncertainty around government stimulus measures.
“It may be too early to declare a sustained recovery in China’s consumption activity,” said Nicole Wong from Manulife.
In India, some analysts still see opportunities for profit-taking, particularly in large-cap companies in sectors like financials, real estate, and banking. Ken Wong, Asia equity portfolio specialist at Eastspring Investments, revealed that he plans to reduce exposure to small- and mid-cap Indian stocks while maintaining a focus on large-cap names.
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