DeepSeek's AI sparks major investment shift from India to China

China is experiencing a significant shift in investment focus influenced by the launch of DeepSeek, an artificial intelligence startup founded by hedge fund manager Liang Wenfeng. Since the release of its R1 model in January, which boasts lower costs and superior performance compared to established U.S. AI systems, Chinese equities have seen a substantial rise. From January's low, the MSCI China Index increased over 26%, reflecting heightened investor enthusiasm. In contrast, Indian stocks have struggled, with the MSCI India Index losing over 7% year-to-date amid economic challenges and lower growth projections. The surge in Chinese stocks is accompanied by a notable shift in global emerging markets (EM) funds. By late January, a growing number of funds were reported to be “Overweight” on China and Hong Kong equities, while others adjusted their positions by reducing exposure to India. As sentiment continues to favor Chinese tech companies, the outlook for Indian equities has darkened. The decline in India's stock market is attributed to a combination of disappointing economic data and investor caution about the country's growth prospects. Overall, this has led to a marked rotation of capital from India to China, specifically directed toward the technology sector. In the broader economic context, China's recovery from the pandemic remains uneven, with lingering headwinds such as a fragile financial system and government policies. Investors are reminded of the volatility that characterized the Chinese market, especially with concerns surrounding the ongoing trade tensions and potential economic constraints. While the recent developments around DeepSeek might embolden investments in China, experts caution that the prolonged recovery and uncertainty in government intervention could hinder sustained improvement in the sector. This pivotal moment in the global AI landscape is being closely monitored. The launch of DeepSeek not only evokes national pride in China's technological capabilities but also challenges the dominance of established players in the market. Local government officials have also been urged to adopt AI technologies, emphasizing the importance placed on advancing the national technology agenda. Nevertheless, there remains a cautious approach to investing in the highly volatile Chinese equity market as experts weigh the risks against potential returns.