After the drama in equity markets at the start of the week, following news of a new, supposedly cheaper AI app from China, wealth managers consider the impact on US Big Techs and outlooks on equities more generally.

Monday's slump to Big Techs, in which about $1 trillion was erased from stocks such as Nvidia and Microsoft, following news that China’s DeepSeek AI app has been developed for a fraction of the cost of the US versions, has already caused investors to reconsider portfolio positions.

The scale of the selloff suggests that investors were caught napping by the news about DeepSeek. The tech-heavy Nasdaq slid by 3.1 per cent on Monday, with Nvidia shares slumped 16.9 per cent by the close. Nvidia is the standout player for advanced AI chips and its stock price has rocketed by about 10 times since early 2023, propelling it into the rankings of the so-called “Magnificent Seven” stocks (Apple, Microsoft, Amazon, Tesla, Meta, and Alphabet). Before this week, Nvidia boasted a market cap of $3.3 trillion. Yesterday (29 January), shares in Nvidia and other large tech firms recovered, but did not win back all the ground lost at the start of the week. 

Last week DeepSeek released a new R1 model that claims to be as advanced as OpenAI’s on capabilities such as maths, code and reasoning tasks. Importantly, the new app is reported (Wall Street Journal, others) to need fewer advanced chips to train than other advanced AI models. It cost an estimated $5.6 million to develop, small versus how other advanced models cost more like $1 billion. The sheer gap in cost has rattled investors. Silicon Valley investor and Trump tech ally Marc Andreessen has reportedly likened the development to the Soviet Union’s launch of the Sputnik satellite in 1957 – a development that jolted the US into investing heavily in science, R&D and improving teaching of science, technology, engineering and maths (STEM) in schools and colleges.

While some commentators might regard what China has done with foreboding, there’s an upside, argues Jacques-Aurélien Marcireau, co-head of equities at Edmond de Rothschild AM. 

“In a world where industry concentration is rising, and poised to rise even more given President Trump’s deregulation agenda, it is worth noting that innovation suffers from too much concentration. Why innovate when you can just extract value from your dominant position? In many cases, China Inc brings much needed competition to keep the incentive to innovate vigorous. The question about whether this competition is fair is a matter of debate – and rightly so – but in the DeepSeek case, there is none,” he said in a note. 

“China’s integration into the world economy since the 2001 WTO agreements has been a wild ride. With the country now becoming a ‘strategic rival’ and disagreements rising across swathes of topics, the DeepSeek revelation is an opportunity to reflect on what China can bring positively to the world,” he continued. “The Deepseek news has two major pointers. It cuts (by a 10x factor versus western competitors) the cost of computing. That’s good for making Gen AI more viable. Second, it is open source, meaning that instead of cloaking advances in secrecy, China is actively contributing to the open source community, sharing knowledge for everyone’s benefit. Beyond this, actually making strides without vast financial firepower should remind us Europeans that by being creative we can overcome some of the ‘tech debt’ that some thought was insurmountable.”

“Beyond DeepSeek, which at the end of the day is incremental to the long arc of the AI world and maybe not as revolutionary as the headlines and market reaction suggest, an often underestimated topic is healthcare. China is innovating in the healthcare sector, and it would be hard to argue against more progress in drug discoveries and ways to treat patients. US-based pharmaceutical companies are making an increasing number of deals to in-license early-stage assets from China biotech. Some of the best and most innovative drugs, including antibody-drug conjugates in oncology, were licensed from Chinese companies,” Marcireau said. 

Marcireau's point about the falling costs of using AI is important. Take the wealth management sector itself – this news service is charting what the use cases for AI are in wealth management (see examples here and here.) One challenge presented by AI, and by another tech trend of recent years – blockchain – is being able to generate enough reliable, affordable electricity to power the data centres and other elements of tech infrastructure to make these innovations viable. This presents another challenge for some governments in achieving net zero in carbon emissions. 

Alex Stauffacher, equity analyst at Vontobel, said DeepSeek suggests that Chinese AI engineers have found a way to work around US-led export bans on advanced semiconductor technologies. He said the new app, and possibly other changes, should encourage investors to diversify exposures beyond the US, and could also benefit emerging markets. 

“The astonishing performance of DeepSeek's model is mainly due to a combination of architectural optimisations such as Mixture-of-Experts design and custom communication schemes between chips,” Stauffacher said. “This technological advancement shows that much higher cost efficiency is possible in AI development. However, this is unlikely to cause a slowdown in overall AI investments just yet, as the race towards Artificial General Intelligence (AGI) is in full swing. Meta recently announced over 50 per cent growth in capital expenditures on AI projects in 2025, and Project Stargate from OpenAI/Oracle/Softbank, revealed during the World Economic Forum, is expected to be worth $500 billion.

“Despite the US's efforts to stall China's progress in AI through export restrictions, these sanctions appear to be ineffective. DeepSeek states it used Nvidia H800 chips for training, a down-spec'ed version of the H100 for the Chinese market. But it's unclear if H100 chips bought prior to the restrictions were involved, or if the company leased more high-end chip capacity from data centres in South East Asia. The Biden administration's recently proposed tightening of export restrictions would address the latter, and further tightening of restrictions is likely,” he continued. 

“The DeepSeek revelations support the expectation for a continued drive for cost efficiency. However, with high expectations comes increased vulnerability, what lead us to a reduction in hardware exposure into 2025. So now, with increased scrutiny on the sustainability of high AI infrastructure investments, we expect some initial hit on the hardware stocks, but would perceive this as a buying opportunity as the improved cost-efficiency should ultimately boost the adoption of AI applications and benefit a wider tech supply chain,” Stauffacher said. 

He added that investors may find value in diversifying out of US stocks and consider equities in markets such as China, where companies are making advances in areas such as AI despite regulatory challenges and US barriers. “This could mark a significant shift in investor sentiment, with emerging markets again becoming increasingly competitive and attractive for investment,” he said. 

Richard Clode, portfolio manager at Janus Henderson, an Anglo-US firm, said: "We continue to expect ongoing strong spending on AI capex as seen recently from announcements by Meta and the Stargate AI project. But we also think we need to be more selective in those AI capex beneficiaries, as well as think about the next phases of AI investment opportunity as this new tech wave develops.

"We characterise infrastructure as the first phase of a new wave followed by platforms and then the software, applications and services. We are approaching that pivot to the platform phase led by the cloud but still see longer-term investment opportunities in AI infrastructure as well.

"The market has rapidly shifted from concerns on AI capex being too high, to now worrying that AI capex is going to collapse. Both cannot happen simultaneously, and the truth likely lies in between. Ultimately, we think these developments are positive for the long-term health and development of AI. We continue to identify selective AI infrastructure beneficiaries and build our exposure to platforms that will benefit from more efficient AI compute, training models and inferencing," Clode added.

DeepSeek encountered problems caused by a cyberattack on Monday, the business said. It will temporarily limit registrations.