DeepSeek drives $1.3 trillion China stock rally as funds pile in
China’s onshore and offshore equity markets have added more than $1.3 trillion in total value in just the past month amid such reallocations, while India’s market has shrunk by more than $720 billion
Highlights:
- Eastspring adding China internet names over past few months
- China 'more attractive than India' on risk-reward: Candriam
DeepSeek's breakthrough in artificial intelligence is helping drive a rotation of stock funds back into China from India.
Hedge funds have been piling into Chinese equities at the fastest pace in months as bullishness on the DeepSeek-driven technology rally adds to hopes for more economic stimulus. In contrast, India is suffering a record exodus of cash on concerns over waning macro growth, slowing corporate earnings and expensive stock valuations.
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China's onshore and offshore equity markets have added more than $1.3 trillion in total value in just the past month amid such reallocations, while India's market has shrunk by more than $720 billion. The MSCI China Index is on track to outperform its Indian counterpart for a third-straight month, the longest such streak in two years.
DeepSeek has shown "that China actually has companies that are forming a vital part of the whole AI ecosystem," said Ken Wong, an Asian equity portfolio specialist at Eastspring Investments. His firm has been adding Chinese internet holdings over the past few months, while trimming smaller Indian stocks that had "run up way past their valuation multiples."
The rotation marks an about-face from the pivot into India seen over the past several years, luring funds away from China. That was based on an India's infrastructure spending splurge and its potential as an alternative manufacturing hub to China. Domestic-focused India has also been seen as a relative haven amid Donald Trump's tariff plans.
China looks to be regaining its former appeal on a fundamental reevaluation of its investability, especially in tech. After scaring investors with corporate crackdowns not long ago, Beijing may actually help push the new AI theme, as indicated by the news that entrepreneurs including Alibaba Group Holding Ltd. co-founder Jack Ma have been invited to meet the nation's top leaders.
DeepSeek-related developments are likely to help boost China's economy as well as its markets, providing an extended boost, said Vivek Dhawan, a fund manager at Candriam. "If you put all the pieces together, China becomes more attractive than India in the current set-up on a risk-reward basis."
The valuation differential adds to China's allure as well. The MSCI China Index is trading at just 11 times forward earnings estimates, compared with about 21 times for the MSCI India Index.
An analysis of Bloomberg data on regional allocations by some of the largest active Asian equity funds shows most are reducing exposure to Indian equities and adding Chinese stocks in recent months.
While DeepSeek has helped accelerate the flows into China, possible upcoming announcements of further Chinese stimulus remain important as well, according to Andrew Swan, head of Asia ex-Japan equities at Man Group.
"We think policy will now shift toward consumption, and a targeted attempt to encourage the currently high levels of savings to be deployed," said Swan. The Man Asia Ex-Japan Equity fund he manages increased its China exposure to 40% from 30% in the past year while trimming its India exposure to 18% from 21%.
A complete reversal in fund flows is unlikely, with India stock bulls including Morgan Stanley saying the recent correction may be overdone and the nation's long-term growth story remains intact.
Meanwhile, the additional 10% tariffs imposed on China by Trump have reinforced Amundi SA's neutral stance on Chinese equities, according to Asia senior investment strategist Aidan Yao. "While a truce is possible as the two sides converge in trade talks, the external dynamics will remain fluid and challenging for China in the foreseeable future."
There's also skepticism among traders who have been burned by failed China rallies in the past. Some have pointed to crowded trading and increasing valuations as reason for caution.
Helen Zhu, chief investment officer at Nan Fung Trinity HK Ltd., sees uncertainty over whether DeepSeek's AI success can be repeated. "At the end of the day, you don't really know what the potential monetization opportunities are over the medium to longer term," she said.
Nonetheless, there's a palpable buzz of "China's back" in the markets of late. The positives keep piling up, with Alibaba adding $100 billion in market value over the past five weeks and the Hang Seng Tech Index entering a bull market.
"The DeepSeek news was a well-timed and impactful catalyst that market participants were able to build a case for a reentry" into Chinese markets, said Nicole Wong, a portfolio manager at Manulife Investment Management. "From a tactical standpoint, we think it makes sense to be taking advantage of this momentum.
