China flag, left, Indian flag arranged for photos.
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Deepseek's breakthrough in artificial intelligence has fueled the sentiment of investors around Chinese stocks. It has acquired more than 26% offshore stocks since its January lows and more than the country's land scale.
The surge in Chinese stocks comes when Indian stocks are struggling in the realm of corrections. Experts point to the rotation from India to China.
“Every time the Chinese market rises, the Indian market drops,” said Tioshoezhua, managing director and head of equity at Lion Global Investors.
China's CSI300 had given negative returns for the third consecutive year before recording strong profits last year, but Indian stocks have seen secular growth for the past nine years, but returns for 2024 was much lower than last year.
“That's what's going on because we need to sell something to fund something new, especially in the disappointment we saw in India,” she told CNBC.
China's stocks, led by high-tech rally, have been in tears since Deepseek's R1 model was released in January and challenged the US-led AI ecosystem, far more than more established AI players It claims excellent performance at a low cost.
The Hang Seng Tech index, which tracks the 30 largest tech companies listed in Hong Kong on Friday, reached its highest in almost three years.
Meanwhile, the MSCI China Index has risen 26.5% from its January low, but has risen nearly 18% this year, while the MSCI India Index has lost more than 7% per year.
The reallocation to China is driven by a stronger narrative in several respects, said Alex Smith, Abrdn's Asian and EM equity investment specialist.
Every time the Chinese market rises, the Indian market falls.
Thio Siew Hua
Lion Global Investor
“We saw strong [China] Smith told CNBC.
The rise of Deepseek has sparked interest from investors in Chinese high-tech companies. China's home-based models, such as Deepseek's R1 and Alibaba's Qwen 2.5, demonstrate their ability to continuously improve performance while reducing inference costs, Smith said.
India's declining appeal
India's economy is working to slow down, and stock markets have been revised sharply in recent months, with short-term earnings expectations still sluggish, Smith said.
India's GDP rose 5.4% in the quarter that ended in September, reflecting the weakest growth in the past seven quarters. At the beginning of the year, the government reduced its economic growth forecast for the ending year in March to a minimum of 6.4% over four years.
By the end of January, 33% of the large global EM funds surveyed by Nomura were “overweight” Chinese and Hong Kong stocks, up from 26% in December. Conversely, Nomura's statistics show that global EM funds are up 6% in Indian stocks.
Over 50% of the funds surveyed said they had cut their allocations to India by the end of January, while their allocations to stocks in China and Hong Kong increased.
Indian Benchmark Nifty 50 for the past year
Manulife's portfolio manager Nicole Wong told CNBC that he had made profits from India's allocation in January and became “overweight” in the Chinese and Hong Kong stock markets, particularly in China's technology sector.
She added that India's stock market momentum has been somewhat reversed after Indian stocks saw it as a favourable place to park money within emerging market space for much of 2024.
Following the pandemic, many investors have moved from China and money has moved towards countries like India, Chio said.
China's CSI 300 suffered annual losses of 5%, almost 22% and 11% or more in 2021, 2022 and 2023, respectively. Conversely, India's clever 50 brought annual profits of over 24%, 4% and 20%.
Current flow rotation is meaningful. Investors are now firmly in President Donald Trump's second era and are likely to continue to look at more aggressive stimulus measures coming out of China considering the threat of tariffs, Abrdn's Smith said.
Optimism about the Chinese market is on the rise, but the country's economy is facing several headwinds. This requires a careful approach, experts suggest.
“It may be a little too early to say that the worst is behind us in terms of seeing a sustained recovery in China's consumer activity,” Manurife's Wong said.
It is important to note that the Chinese market remains relatively unstable, according to James Liu, founder and head of research at ClearNomics.
“Factors such as the growth of the trade war, repeated concerns about China's financial system, the real estate bubble and uncertainty about government stimulation will likely drive volatility in 2025,” he said.
In Indian equities, Kenwon, Asian equity portfolio specialist at East Spring Investments, has still had for-profit opportunities since the beginning of this year, considering revisions.
Wong, who allocated 51% of his portfolio to China and 46% in India, is seeking to reduce exposure to small and medium-sized names in India, but has some big companies: finance, real estate, and Banking sector.
