DeepSeek’s breakthrough innovation in artificial intelligence (AI) is driving a resurgence in Chinese equities, prompting hedge funds to reallocate funds from India to China at the fastest pace in months, per Bloomberg, as quoted on Yahoo Finance. The bullish sentiment around China’s AI-driven technology rally, coupled with expectations of further economic stimulus, has contributed to this rotation.
Market Movements: China Gains, India Declines
China’s onshore and offshore equity markets have gained over $1.3 trillion in value in the past month, while India’s market has contracted more than $720 billion. The MSCI China Index is set to outperform its Indian counterpart for a third successive month, marking its longest winning streak in two years, per the Bloomberg article.
China’s AI Ecosystem Attracts Investors
According to Ken Wong, an Asian equity portfolio specialist at Eastspring Investments, DeepSeek’s success highlights China’s role in the global AI ecosystem. His firm has been increasing exposure to Chinese Internet stocks while trimming holdings in smaller Indian equities that had become overvalued (read: DeepSeek Buzz Boosts China Tech ETFs).
Renewed Confidence in China’s Investability
China’s appeal is strengthening as investors reassess its long-term potential, particularly in the technology sector. After previous regulatory crackdowns, Beijing appears to be supporting the AI-driven economic shift, as seen in reports that prominent entrepreneurs, including Alibaba co-founder Jack Ma, have been invited to meet with top government officials. Alibaba has gained $100 billion in market value over the past five weeks, while the Hang Seng Tech Index has entered a bull market.
The DeepSeek buzz made the matter even more appealing. DeepSeek, a Chinese startup developing AI models, grabbed headlines with the release of its new R1 model in late January. According to Yahoo Finance, the company revealed that training the R1 model cost just $5.6 million, significantly less than the $100 million required to train OpenAI's GPT-4 model.
Stimulus Expectations is Positive for China Investing
Beyond DeepSeek’s influence, expectations of further economic stimulus in China are also attracting investors. Government stimulus measures brought investors back to one of the world’s most beaten-down markets. Chinese authorities have implemented some of the most significant economic measures in recent years, including interest rate cuts, home purchase incentives and capital market funding schemes.
Andrew Swan, head of Asia ex-Japan equities at Man Group, predicts a policy shift toward boosting consumption and encouraging high savings to flow into the economy. Man Group’s Asia Ex-Japan Equity Fund has raised its China exposure from 30% to 40% in the past year, while reducing its India allocation from 21% to 18%, per Bloomberg (read: China May Ease Monetary Policy After 14 Years: ETFs in Focus).
Valuation Gap Favors China
China’s cheaper stock valuation is another plus. The MSCI China Index is currently trading at 11 times forward earnings compared to 21 times for the MSCI India Index. Analysis of major active Asian equity funds indicates a steady increase in Chinese holdings while Indian allocations are being reduced.
Which China ETFs Should You Buy?
Below, we highlight a few China-based exchange traded funds (ETFs) that could gain on compelling valuation, recent winning momentum and news of monetary policy easing. These ETFs have considerably low price-to-earnings (P/E) ratios, indicating cheaper valuation.
First Trust China AlphaDEX Fund FCA – Up 6.4% YTD (as of Feb. 14, 2025); P/E: 4.75X
iShares China Large-Cap ETF FXI – Up 17.2% YTD (as of Feb. 14, 2025); P/E: 10.62X
Franklin FTSE China ETF FLCH – Up 15.4% YTD; P/E: 10.87X
iShares MSCI China ETF MCHI – Up 16.2% YTD; P/E: 10.89X
Any Wall of Worry?
Despite the surge in interest, a complete reversal of fund flows remains uncertain. Morgan Stanley and other India bulls argue that the recent correction in Indian equities may be overblown, with the country’s long-term growth prospects still intact. Meanwhile, an additional 10% tariffs imposed on China by Trump have led some firms, such as Amundi SA, to maintain a neutral stance on Chinese equities.
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First Trust China AlphaDEX ETF (FCA): ETF Research Reports
Franklin FTSE China ETF (FLCH): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
