'Buy China, Sell India' tactical trade rises on DeepSeek-led AI boom, delayed Trump tariffs

The MSCI China index was among the best performing indices in 2024, gaining 19.7 percent.

While foreign outflows from Indian equities continue unabated, China’s shifting narrative seems to be drawing fresh investor interest. Optimism around stimulus measures, Xi Jinping’s meeting with Alibaba’s founder, and a milder-than-expected US stance on China tariff—coupled with attractive valuations—are making Chinese stocks increasingly appealing to global investors.

India flows continued to remain under pressure for the fifth consecutive month, seeing redemptions of $405 million in the week gone by. On the flip side, China saw its largest ever flows for the week since October 2024, with FPIs putting $573 million into Chinese equities.

Chinese equities are outperforming India. Over the past six months and one year, MSCI China has significantly outperformed MSCI India, delivering returns of 28.9 percent and 38.0 percent, respectively, compared to India's declines of 13.2 percent and 2 percent during the same time period.

However, the gains came at the cost of Indian equities, as foreign portfolio investors reallocated their capital from India to China.  With murmurs of a fresh Chinese measures to shore up economic activity, are Indian equities slated for further pain?

China's stimulus measures so far...

In September 2024, the outlook on emerging markets switched, with the bias tilting in favour of China, compared to India.  China announced a big-bang stimulus package to revive their ailing economy, causing Chinese equities to spurt sharply after seeing a period of lacklustre trade.

The Chinese central bank rolled out a slew measures in September 2024, aiming to restore confidence in the country's ailing economic and financial landscape. The People's Bank of China (PBOC) trimmed the benchmark lending rate, cut the minimum down payment ratio for homebuyers, and announced funding for equity purchases.

The measures were followed up by further cuts in the the policy rate and a 1 trillion yuan debt financing package in October and November. The Chinese government also hiked its fiscal spending, marking a shift from its previous cautious approach.

The combination of these measures caused record FII outflows out of India, with global fund managers turning towards China to maximise their return potential. The outflow of hot money caused the Indian stock market to enter a corrective rout, further exacerbating flow

MSCI India's market capitalization has moderated to $3.17 trillion dollars, from $3.81 trillion from six months ago. On the other hand, MSCI China's m-cap has seen a sharp uptick, jumping to $9.66 trillion.

In 2024, the MSCI China index was among the best performing globally, rising 19.7 percent, only outperformed by the S&P 500 index, which gained over 23 percent during the year.

China's AI drive, further stimulus

In January 2025, China-based artificial intelligence startup unveiled DeepSeek, a generative AI model that was built on a fraction on the cost of US-based AI models. The AI play sent shockwaves around the globe, with US technology behemoths seeing major selling pressure as money managers redoubled bets on China.

Analysts at global brokerage Goldman Sachs noted that DeepSeek has altered the narrative of China technology, re-rated investors’ optimism about the growth of and economic benefits from AI. The widespread adoption of artificial intelligence could bump up China's EPS by around 2.5 percent CAGR for the next ten years.

Goldman Sachs also raised its target on the MSCI China index, believing it could hit the 85 mark over the next 12 months, while the target for the China-based CSI 300 Index was hiked to 4,700.

Further, Chinese President Xi Jinping met Alibaba co-founder and tech billionaire Jack Ma, along with other tech leaders and industry players on February 17, 2025. The meeting with Ma, who kept a low profile following his scathing remarks on Chinese governance, was seen as one of the clearest indicators of the Chinese government's backing in the technology race, seeing the segment as one of the key economic drivers. Analysts are also betting on further stimulus measures to boost economic growth.

Also Read | China’s loss not India’s gain: tariff wars are bad for everyone, India included, says Neelkanth Mishra

Way Forward?

The pain in Indian equities is likely to continue, as foreign investors continue their selling spree. The cheaper valuations in China and Europe, coupled with geopolitical tensions, is likely to keep the bias in favour of low-risk bets.

In a note, Nomura Holdings said, "On India equities, we had made a case for their outperformance  but renewed optimism in China stocks makes the case less compelling, in our view. Investors also seem to be concerned about INR  weakness (on top of concerns over continued domestic slowdown; tight banking sector liquidity; Trump’s tariffs; risk of slowdown in domestic equity flows)."

"Structurally, we remain overweight India stocks, but these factors suggest India stocks might not be an outright buy. MSCI India currently trades at 21x forward P/E," added the brokerage.

"If the Chinese government’s new initiatives attract positive responses from the FIIs, that means more bad news for Indian markets. More money will flow into Chinese stocks through the Hang Seng exchange since the PE is around 12x compared to the 18.5 one-year forward PE in India," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services​.

FIIs will return to India when the dollar depreciates and the US bond yields start coming down, which might take time, he added​. Further, a broad-based earnings recovery is needed, before Indian equities look attractive again.

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