China’s AI Advances Unsettle US Tech

DeepSeek - China’s AI Progress is Causing Unrest in the US Tech Industry

Recently, DeepSeek, a Chinese AI firm, unveiled a groundbreaking artificial intelligence model, posing a significant challenge to the US's dominance in AI technology and raising concerns about the substantial investments in AI infrastructure. This development has led to a decline in the stock prices of companies heavily involved in AI this week. AI Wealth's recommendation is to remain composed.

Sanaj Rijhsinghani, LGT's Chief Investment Officer, provides a recap of the past week in the markets and offers a preview of the coming week.

The US and AI Dominance?..

Over the years, the excitement around AI has driven markets upwards, adding more than $14 trillion to the Nasdaq 100 and propelling the S&P 500 to unprecedented heights. Riding this wave of momentum, President Trump proclaimed the US as the global leader in AI. Unsurprisingly, the US has taken measures to impede China's progress in AI. These measures include export restrictions aimed at blocking access to the most advanced chip technologies, aimed at safeguarding national security and maintaining US leadership in future technologies. Developing AI models demands significant computational power and the most sophisticated microchips.

As a result, US tech companies have invested heavily in computing infrastructure in recent quarters, both to develop their own models and products and to offer computing power as a cloud service. The goal was to outspend competitors to create a substantial economic advantage and stay ahead of the competition.

The Emergence of DeepSeek's AI

DeepSeek's debut comes amid scrutiny of the largest US tech companies regarding their AI and R&D budgets and whether their stock prices are based on misplaced optimism or genuine value. Additionally, there are concerns about the high concentration of tech and AI-related stocks in the US equity market.

DeepSeek's model aims to compete with US companies like OpenAI and Meta, but more efficiently and with lower computational power. Reportedly developed in just two months at a cost of less than $6 million, the model relies on older generations of Nvidia chips (H800) that were approved for export. The model is open-source and has been downloaded thousands of times from the Hugging Face AI platform in a short period. This progress raises questions about the large investments in computing infrastructure by US giants and casts doubt on the effectiveness of US export controls.

Officially, China does not have access to Nvidia's most advanced chips, and it remains uncertain whether the information about DeepSeek's model development is accurate. While there have been rumours of advanced chips reaching China indirectly, the restrictions may have prompted Chinese developers to explore alternative methods for improving model development.

Stocks with High AI Exposure Under Pressure

The release of DeepSeek's model has put pressure on stocks of companies with significant AI exposure. For example, Nvidia, which lost $600 billion in market cap, was down about -17% on Monday, and the same for Broadcom. This includes major tech companies that have been at the forefront of AI. The world will need more computing power even without AI, but demand for high-performance chips may be lower than expected as AI techniques become more efficient. This would also affect data centre suppliers (e.g., electrical infrastructure). On the other hand, greater competition and lower model development costs could make AI more affordable and easier to deploy, benefiting providers of AI applications.

A Need for Clarity

The release of the DeepSeek model has dampened sentiment in the US technology sector and around the AI theme. However, it is still unclear how effective the DeepSeek model truly is and whether it is based on existing large foundation models (e.g., Meta's Llama models) that require significant infrastructure investment. In the upcoming reporting season, the DeepSeek model and infrastructure investments are likely to be in the spotlight and should provide more clarity on the potential threat. We, therefore, advise investors to remain calm.

AIW's Perspective and Strategy

Understandably, this is a concerning time, with news of sharp downturns and market darlings like Nvidia coming under pressure. However, AIW remains focused on assessing both the risks and opportunities of each situation. The US technology sector has been a driving force behind the strong performance of the S&P 500 over the past two years. Investors' hopes, and consequently their expectations for future earnings growth, are largely reflected in valuations. It is, therefore, not surprising that news from China is causing nervousness.

Our model portfolios remain globally diversified, as we understand the importance of spreading risk on both a regional and sector basis. Importantly, we never diversify just to reduce potential volatility but to hold assets we see value in. We have seen value in both US technology stocks and other areas in the US. We have included the S&P 500 Equal Weighted Index to increase exposure to other sectors of the US market. Additionally, we are well-positioned in sectors likely to benefit from any rotation away from mega-cap tech companies.

As the financial markets react to the emergence of DeepSeek's AI, it's good to know that AI Wealth, specialises in navigating such uncertainties whilst aligning your portfolio with your financial goals. Start your journey towards a secure financial future today by scheduling a free consultation with our expert advisors. Simply click the "Book a Meeting" button below to choose a convenient time, and let's talk about how we can support your success in the ever-changing economic environment.