How DeepSeek Sparks a $1.3 Trillion Rally in China Stocks: What Investors Need to Know

(Bloomberg) — DeepSeek’s advancements in artificial intelligence are creating a shift in stock investments. Investors are increasingly turning their attention back to China, moving away from India.

Recently, hedge funds have been rapidly buying Chinese stocks, spurred by optimism surrounding DeepSeek’s tech innovations and expectations of economic support from the government. Meanwhile, India is witnessing a significant outflow of funds due to concerns about slowing economic growth and high stock prices.

In just a month, China’s stock markets have gained over $1.3 trillion in value, while India’s market has decreased by more than $720 billion. The MSCI China Index is set to outperform the MSCI India Index for the third consecutive month, marking the longest such trend in two years.

Ken Wong, an equity portfolio specialist at Eastspring Investments, noted that China is home to key companies involved in the AI sector. His firm has shifted its investments towards Chinese tech stocks and reduced its holdings in Indian firms, which he believes have become overvalued.

This shift reverses the trend from the past few years, when many funds favored India due to its infrastructure investments and its status as an alternative manufacturing option to China. India had appeared safer for investors, especially during trade tensions involving the U.S.

China seems to be regaining its attractiveness to investors. Recent moves by the Chinese government to support the tech sector, including encouraging meetings with influential entrepreneurs like Alibaba’s Jack Ma, have renewed interest.

Furthermore, experts believe that DeepSeek’s developments could positively impact China’s economy and stock markets. Vivek Dhawan from Candriam feels that comparing the risks and rewards, China currently appears more appealing than India.

Valuations also favor China; the MSCI China Index trades at around 11 times estimated earnings, while the MSCI India Index is at approximately 21 times.

An analysis of major Asian equity funds shows a clear trend: many are cutting back on Indian equities while increasing their Chinese investments. Although the confidence in DeepSeek has fueled this trend, potential announcements of further economic support from China will also play a critical role in attracting investment. Andrew Swan from Man Group mentioned a policy shift focused on consumption, indicating a move to encourage higher savings levels.

Despite the current trend, a complete reversal in investments is unlikely. Some analysts, like those from Morgan Stanley, argue that India’s long-term growth potential remains solid, and recent corrections in the market may be overstated.

However, challenges await China, especially regarding trade tensions with the U.S. Aidan Yao from Amundi SA maintains a cautious approach, suggesting that while improvements in trade talks could help, the external environment remains complex.

Traders are also being careful, recalling previous failed rallies in Chinese markets. Helen Zhu from Nan Fung Trinity HK Ltd. expressed uncertainty about the future potential of AI advancements like DeepSeek’s.

Still, there is a noticeable enthusiasm for China’s market revival. Alibaba has gained $100 billion in value lately, and the Hang Seng Tech Index has entered a bull market. Nicole Wong from Manulife Investment Management remarked that the DeepSeek news has sparked renewed investor interest, creating an opportunity to capitalize on the momentum in the Chinese markets.

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