DeepSeek disruption

Lunar New Year celebrators were in for a new repertoire of questions over reunion dinners: DeepSeek and the tech "bloodbath" that followed. In what seemed like an overnight sensation, the DeepSeek AI app quickly dethroned ChatGPT on app stores worldwide, captivating users with its cost-effectiveness (it’s free!) and functionality similar to ChatGPT.

This unexpected development sent shockwaves through the US tech market – Nvidia’s market value fell by nearly US$600 billion on 27 January, marking the largest one-day wipeout in US stock market history. Including some names in the Magnificent 7, other investor darlings in the AI-related businesses also followed suit, putting a hard stop to the tech rally that had kept investors happy throughout 2024.

Sputnik moment

The market’s knee-jerk reaction was primarily due to the revelation that DeepSeek’s open-source model was built on a mere US$6 million budget and in just two months, all amid a chip ban – the US has banned the export of advanced computer chips to China since 2022. 

This goes against the industry consensus that building and training AI models requires a heap of capital, and very high-functioning chips like those invented by NVIDIA, and therefore difficult to take over existing market leaders in the US.

This development rapidly reshaped the way investors viewed the dynamics of the global AI race, shifting from the previous US dominance to potentially a bipolar US-China structure, akin to the “Sputnik moment” of the 1950s between the US and Soviet Union. The previous consensus on AI leadership by US big tech companies (Alphabet, Meta, Apple, etc.) and the demand for advanced chips (NVIDIA, Broadcom, etc.) were quickly called into question.

Meanwhile, geopolitical concerns also surfaced: US officials are probing whether DeepSeek had obtained NVIDIA chips “illegally” to bypass the chip ban, while Korea, Australia, and Taiwan are banning the use of DeepSeek on government devices due to concerns about how personal information is handled by the app.

Read more: Top 3 concerns of fund managers in 2025

What now?

Amid all the noise, the market took a few more days to digest the news, and some optimism seems to have returned. Tech stocks have stopped plunging (as of Feb 2025), and while they have yet to recover to their previous highs, some are showing signs of a rebound.

Analysts suggest that the DeepSeek model, while impressive and efficient, is more of a cost enhancement rather than a groundbreaking innovation. In fact, there are accusations of the DeepSeek model being an “imitation” – OpenAI has claimed that DeepSeek copied aspects of ChatGPT’s model, allowing it to train its model at a fraction of the cost. Experts have also questioned DeepSeek’s claims about its low cost and the chips it uses, suggesting the development costs may be higher.

Either way, industry insiders believe that increased competition in the AI space will benefit both the field and end users. 

For instance, as DeepSeek made its model open source, OpenAI has responded by improving its transparency (by sharing the details of the reasoning process of its latest model) and lowering the cost of its AI-generated outputs. Alphabet is also betting that cheaper AI will, in turn, boost demand for its services, and plans to increase capital expenditures by 42% to US$75 billion this year to accelerate its AI progress.

What’s in it for you?

Amidst all the noise and the many considerations spanning technology and geopolitics, nothing is certain about the next steps. As technology users, we can observe market developments and enjoy the benefits they bring, and for peace of mind, consider diversifying our investments to mitigate the impact of headline news on our portfolios.

Global equity

Equity markets kicked off 2025 with a positive bang, though the return constituents differed somewhat from what investors saw in 2024.

Value stocks outperformed their growth counterparts, and European stocks outpaced those in the US. Market volatility was driven by various market headlines, including concerns over inflation from Trump policies, a weaker-than-expected December US inflation print, and the subsequent sell-off in DeepSeek AI. 

Gains in Europe were supported by improving investor sentiment around the eurozone macro data and a sharp depreciation in the GBP, which provided an extra buoy to the FTSE All-Share index, consisting largely of companies that derive revenues outside the UK.

Emerging markets, on the other hand, continued to lag behind developed markets. China equities ended the month underwater, although they showed marginal improvement towards the end of January due to more positive domestic economic data. India equities also struggled, weighed down by weakening sentiment around the domestic economy and earnings.

Global fixed income

Fixed income assets spent the December holiday season and entered the new year in a muted mode, due to Federal Reserve Chair Jerome Powell’s statement signalling fewer rate cuts in 2025. Bond investors experienced a surprise rally in the later part of January. This was driven by weaker-than-expected US inflation data and a flight to safety following the AI stock selloff. 

It is worth pointing out that the AI selloff had a limited negative impact on the corporate credit market as well, as the technology sector plays a smaller role in credit markets, and many companies spending on AI capital expenditure tend to be established players with robust balance sheets.

The broader fixed income market ended the month positive, but yields continued to rise, despite being in a rate cut cycle, as the Fed repeatedly noted that it is “not in a hurry” to cut rates after holding rates constant at the January meeting. This implies that the Fed is unlikely to cut in March, either due to strong US economic growth and/or jobs data.

Elsewhere, Trump's tariff policies continued to impact the outlook on rate cuts, with the ECB emphasizing flexibility amid the policy uncertainty.

Commodities

Commodity markets saw broad gains in January, led by precious metals. These gains were driven primarily by fears of a trade war spurred by the potential for Trump’s aggressive tariff policies, as well as the technical complexities that tariffs would impose on short-selling precious metal futures, particularly silver. 

The agricultural sector, led by arabica coffee, also experienced gains, while crude oil suffered due to weakening growth sentiment following Trump’s economic plans for tariffs and immigration.

Interestingly, the DeepSeek selloff did not negatively impact copper prices. Copper, a critical metal for electrification, remained resilient, suggesting that demand for copper is driven by an overall strong demand for power, not just limited to the AI and data centre space.