India's economic landscape is undergoing a significant transformation as investors shift their focus from Indian stocks to Chinese equities. This change comes on the heels of India's GDP growth slowing to 5.4% in the quarter ending September, marking the weakest expansion in the last seven quarters. At the same time, China's tech sector, rejuvenated by advancements such as DeepSeek's R1 model and Alibaba's Qwen 2.5, has piqued investor interest, leading to an increased allocation of funds towards Chinese markets.
Over half of the funds surveyed by Nomura indicated a reduction in their investments in India by the end of January, while allocations to China and Hong Kong equities saw an uptick. The technological innovations from companies like DeepSeek have fueled a surge in Chinese stocks, particularly in the tech sector. The MSCI China Index has climbed nearly 18% this year, a stark contrast to the more than 7% decline witnessed by the MSCI India Index.
The Hang Seng Tech Index, tracking the top 30 technology firms listed in Hong Kong, recently reached its highest level in nearly three years. This tech rally has been instrumental in driving up Chinese stocks, which have been gaining momentum since the debut of DeepSeek's R1 model in January. Meanwhile, China's CSI 300 Index recorded losses of over 5%, nearly 22%, and more than 11% in 2021, 2022, and 2023, respectively, underscoring a volatile market environment.
In India, the Nifty 50 Index posted yearly gains of over 24%, 4%, and 20% during the same period, highlighting consistent growth. However, returns for Indian equities in 2024 have been notably lower compared to previous years. The Indian government has also revised its economic growth projection for the fiscal year ending in March to 6.4%, marking the lowest rate in four years.
Nicole Wong, a portfolio manager at Manulife, decided to take profits on her India allocations in January and shifted to an "Overweight" stance on China and Hong Kong's equity markets. She noted that "it may be a little too early to say the worst is behind us in terms of seeing a sustained recovery in consumption activity in China."
The current rotation of investment flows is significant as it takes place during President Donald Trump's second era, with expectations of more aggressive stimulus measures from China. This shift also reflects a broader trend where many investors moved out of China post-pandemic, redirecting funds to countries like India. However, recent developments have prompted a re-evaluation of these strategies.
Nomura's statistics reveal a 6% increase in global emerging market funds becoming "Underweight" on 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." This sentiment captures the inverse relationship observed between these two major Asian economies.
Despite the recent enthusiasm surrounding Chinese stocks, some experts urge caution. James Liu, founder and head of research at Clearnomics, warned that "factors such as a growing trade war, recurring concerns over the Chinese financial system, the real estate bubble, and uncertainty around government stimulus will likely drive volatility in 2025."