Why UK markets could be unexpected winner from DeepSeek and Nvidia AI shock to US AI giants
A frenzied market session in the US on Monday shook some trees as investors scrambled to assess the overseas threat to a previously unassailable technology position.
Unsurprisingly, AI poster child Nvidia was caught in the eye of the storm. Its shares plunged by 17 per cent with some further weakness implied by the futures price.
The DeepSeek threat has certainly ruffled feathers and even if this particular storm subsides, other challenges to the US AI dominance could follow.
This is a burgeoning sector which has powered much of the US market's gain over the last couple of years, such that the unease is understandable.
Even so, Nvidia shares remain higher by 90 per cent over the last year even after yesterday’s torrid outing and the next few trading sessions will be pivotal in deciding where the correct level might be for AI shares more broadly.
Related stocks also followed suit as some investors chose to take some money off the table, with declines of over 17 per cent for Broadcom and 6 per cent for AMD, while Microsoft dropped by a more restrained 2 per cent. In contrast, there was some resilience from parts of the “Magnificent Seven” which actually dodged the bullets, with gains of 3 per cent and 2 per cent for Apple and Meta Platforms respectively. These stocks will remain in sharp focus as the week plays out, with updates due from Meta Platforms, Microsoft, Tesla and Apple.
Given the domination which has resulted in this small group now accounting for around a third of the S&P500 and 20 per cent of the MSCI World indices – and indeed more than half of the S&P500’s total return last year – the accompanying comments will be scrutinised as well as the numbers themselves for signs of management reaction.
At this stage, the longer-term investor will likely be watching developments rather than rushing for the exit.
Indeed, there was evidence of rotation rather than sheer retreat as investors sought solace in more defensive areas, such that the more traditional Dow Jones ended the day some 0.7 per cent higher. More broadly, the crucial session over the remainder of the week will give a much clearer picture on sentiment. In the meantime, the Dow Jones has now added 5.1 per cent for the month, with the S&P500 and Nasdaq marginally keeping their heads above water with gains of 2.2 per cent and 0.2 per cent respectively.
The Lunar New Year holiday across parts of Asia led to thin trade in most markets, which will remain a feature this week.
In Japan, technology stocks continued their decline following the moves from Wall Street, with falls of 6 per cent for SoftBank and 7 per cent for Hitachi. The lighter levels of trading will exacerbate price movements, with the dust unlikely to settle until normal trading resumes.
UK markets displayed their defensive characteristics at the open and nudged higher as business largely carried on as normal.
While the relative lack of exposure to pure technology has been something of a drag on prospects over recent years, this can equally come into its own during times of stress elsewhere.
Evidence of rotation elsewhere from growth to value stocks could also provide something of a tailwind if the current conditions persist, underpinned by an index whose constituents are largely mature, cash generative and stable.
Some weakness in mining stocks was offset by a gainers board peppered with defensive names such as National Grid and Halma, leaving the FTSE100 ahead by 4.4 per cent so far this year in contrast to some of its often racier overseas counterparts.
Richard Hunter is Head of Markets for interactive investor