31 Jan 2025
Mike Fox, Head of Equities
Investors may be forgiven for feeling a little weary at the end of a volatile and news heavy January.
Most sensible market watchers warned of increased volatility as we started 2025, in the main due to the re-election of Donald Trump who was inaugurated on 20 January. This has indeed proved to be true, but perhaps not for the reason expected.
Since his inauguration, Trump has been less invasive than he promised he would be. The Russia/Ukraine war has not been ended ‘on day one’ as he claimed it would be. Tariffs have not been applied to China, and indeed some of his commentary has been more conciliatory in tone. This was supportive to equity markets in the days after his inauguration with many markets moving to all-time highs.
This utopia was rudely interrupted by a relatively unknown Chinese Artificial Intelligence (AI) company, DeepSeek, that released a piece of AI software known as a Large Language Model (LLM) which performed as well as OpenAI and ChatGPT. This was not in itself big news, however what spooked Nvidia and AI investors was it needed much less computational power and, because of this, much less energy to do it.
Many investments in the US are not just predicated on AI chips, but also the infrastructure which needs to be built to support them. This includes data centres and energy grids. So, the perception that we can deliver AI with a lot less computational and energy needs impacted several industrial and utility stocks in similar manner to Nvidia.
Is this the end of the AI led bull market? Was AI just a bubble which will now burst? As we have previously noted, one difference between a bubble and a bear market is if you are invested in it or not! To those who have missed out on the investment returns from AI related stocks, this will feel like vindication for their scepticism. For those who have benefited and are still invested, this will seem like a bump in the road. Who is correct?
The best investment tool is a pair of eyes, and what the market was telling us yesterday via share price movements was very instructive. Apple shares were up on the day as what DeepSeek has achieved should allow AI to work on smartphones, not just in big servers. This increases the likelihood of an upgrade cycle for their core product, the iPhone. Meta (Facebook as it was once known) was also up. They will use many LLMs in their business in future years, and if they are becoming cheaper to use and run that will allow Meta to be more profitable.
Companies such as Alphabet (Google) and Microsoft were down only marginally suggesting there are as many positives as negatives for them. The semiconductor companies, such as ASML, Broadcom and Nvidia were down significantly as it was perceived there will be less demand for their products in the future.
The first message from this is the market was not saying this is the end of the ‘Magnificent Seven’ technology companies as some headlines suggested. Some will benefit from DeepSeek. The second message is there is an interesting buying opportunity for those who believe in the Jevons paradox, that efficiency gains generate a net increase in demand. Increasing efficiency should increase demand, which in theory should increase the need for many things the market saw as less valuable yesterday (semiconductors, data centres etc). For anyone who has missed out on AI as an investment area, serious consideration needs to be given as to if this is an opportunity to gain exposure.
Ultimately, investing is about probabilities not certainties. It is impossible to say one day after an event of this scale exactly what the future holds. That said, yesterday saw a lot of knee jerk reactions, accentuated by technical factors in how markets work. What has not changed is the transformational nature of AI and how early it is in its development. This week has increased the scale of its potential impact, and accelerated the time in which it will do this. Logically investors should be enthused by this, not put off!
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.