The Australian Sharemarket closed at a record high last week, surpassing its previous peak from eight weeks ago. The index gained 1.5% for the week, marking its fourth consecutive weekly rise and its strongest performance in six weeks. Investor sentiment was buoyed by growing optimism about a potential rate cut in February, following encouraging inflation data. The Consumer Discretionary sector jumped 4.3% over the week on the back of hopes of a rate cut, which will ease the pressure on households’ budgets. Elsewhere, the Information Technology and Health Care sectors both added 2.6%, while the Utilities weighed on the index, as it dropped 4.5%.
US sharemarkets were mostly lower this week, as the NASDAQ underperformed the broader S&P 500. AI-related news dominated market sentiment, particularly the selloff following concerns over China’s DeepSeek AI model, which may rival leading US models at lower costs, which led to large losses across US semiconductor manufacturers on the day. However, AI-exposed stocks recovered as tech giants reaffirmed their investment plans, with Goldman Sachs downplaying DeepSeek’s long-term threat. The Federal Reserve held rates steady, as Chair Powell emphasised patience given inflation continues to remain elevated. Corporate earnings across the Information Technology sector aided investor sentiment, as Apple (+5.9%) and Meta Platforms (+6.4%) both rose on strong results.
European sharemarkets reached record highs this week, with the STOXX 600 marking its fifth consecutive weekly gain, as it rose 1.8%. The performance of European markets was largely driven by expectations of an European Central Bank rate cut and stronger-than-expected Eurozone Purchasing Managers Index data, even as US tech stocks faced turbulence from China’s DeepSeek AI platform. European sectors, such as Utilities (+3.6%), Health Care (+2.7%) and Financial Services (+2.1%) seemed to benefit from a shift away from the US Information Technology sector.
The artificial intelligence (AI) sector experienced some turbulence last week after Chinese AI startup DeepSeek made a bold announcement. The company unveiled a new AI model, DeepSeek R1, claiming it is both high-performing and significantly cheaper to run than existing models. This raised concerns that current AI infrastructure spending by major players like OpenAI, Alphabet, Microsoft, and Meta might not be as justified as once thought.
As a result, many AI-related stocks took a hit, as investors became less certain of their outlook. However, while DeepSeek’s emergence is noteworthy, we believe the market may have overreacted. A closer look suggests the impact might not be as disruptive as some fear.
Who is DeepSeek and why did this cause a market reaction?
DeepSeek is a relatively new company, founded in 2023, that focuses on open-source AI, meaning its models are publicly available for others to use and build upon. This approach raised fresh concerns that AI advancements could become more widely accessible at lower costs, potentially undermining the significant investments made by tech giants. While these fears are understandable, there are several reasons why we believe DeepSeek’s claims should be viewed with a healthy dose of scepticism:
What does this mean for AI investing?
Even if DeepSeek’s claims hold up, we don’t see this as a major threat to the AI industry. In fact, it could accelerate AI adoption, especially with its open source model making AI technology more widely accessible.
One key takeaway is that AI infrastructure spending remains critical. As AI models become more advanced and widely used, demand for computing power will only increase. This aligns with Jevons Paradox, an economic theory suggesting that as technology improves efficiency, usage actually grows rather than declines. Tech leaders like Meta’s Mark Zuckerberg have long recognised that the future of AI depends on computing power, not just model development.
How we’re positioned
At Cutcher & Neale, we remain comfortable with our exposure to AI-related investments. Our Model Portfolios include key holdings in NVIDIA, Broadcom, Meta, Microsoft, Amazon, NextDC, and Goodman Group, all companies well-positioned to benefit from AI growth.
Our Investment Committee will continue to closely monitor developments in the industry. At this stage, we believe the long-term outlook for our AI exposures remain strong. We will continue to assess and adjust our positioning if needed.
In the week ahead, investors will gain a further insight into inflation levels in Australia, as the Retail Sales for the December 2024 quarter are released.
Internationally, the Bank of England will meet regarding their Monetary Policy, while Eurozone Retail Sales and the US Unemployment Rate will be released.
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