DeepSeek, Trump's tariffs and European equities on the rise

DeepSeek sends shockwaves through the technology sector

At the end of January, the Chinese AI DeepSeek appeared out of nowhere, suddenly challenging the optimistic expectations of a surge in global AI infrastructure spending. The new innovative AI model also raised doubts about the need for NVIDIA's high-performance chips to develop powerful AI models. As a result, some of the stocks seen as winners in the AI theme, particularly semiconductor and AI infrastructure companies, fell sharply. Some energy companies also saw their share prices plummet as growth expectations for data centres, and therefore energy demand, suddenly came down. Some prominent victims of the sell-off included NVIDIA, ASML, Taiwan Semiconductors and Siemens Energy.

In our view, however, DeepSeek will not turn the field of AI on its head. The so-called Jevon paradox is likely to come into play again, i.e. as the cost of developing AI falls, the demand for AI will rise to such an extent that ultimately even more computing capacity (data centres) will be needed than without this cost reduction. Furthermore, the DeepSeek news should be good news for the economy and the stock market as a whole, as we believe there will be far more winners than losers from this development.

In fact, the price losses were limited to a few stocks in the AI sector. In some cases, prices have since recovered. Nevertheless, this event shows quite impressively that, especially with new revolutionary technologies such as AI, investors should always watch out for sudden innovations and new competition for supposedly established companies.

Trump acts on what he says

Once the DeepSeek shock had settled, Donald Trump came out with drastic tariffs. 25% for Mexico and Canada and 10% for China. Although the tariffs for Canada and Mexico were delayed for 30 days, the news still came as a surprise.

In contrast to DeepSeek, the announcement of the tariffs led to a much broader sell-off in equity markets. After all, the risk of a global trade war, which could drag down the global economy and also reignite inflation at least in the short term, has suddenly increased. It is therefore quite remarkable that the markets were able to digest this news relatively quickly and that the upward trend continued almost unabated.

One risk factor equity investors should keep an eye on

If not even the threat of a trade war can shock equity markets, what can? In my view, equity investors should keep a close eye on long-term government bond yields, especially 10-year and 30-year US Treasuries. Should, for whatever reason, those yields rise above 5% towards 6% over the course of the year, things could get quite uncomfortable for equity markets.

European equities on the rise

Despite the prevailing narrative of 'US exceptionalism', it is not the US equity market that has had the strongest start to the year, but Europe. While the S&P 500 is up just 3% year-to-date, many European indices are up more than 10%.

IHow is it that Europe has made such a strong start when it is seen as a potential loser in many respects? After all, Europe's problems cannot be ignored:

• Economic growth has been sluggish for some time (especially in Germany) and lags far behind that of the US.
• The big new technologies and growth themes like AI are less prevalent in Europe but much more in the US and China.
  
• Europe is seen by many observers as a huge bureaucratic monster that is far too sluggish and half-hearted in tackling the great challenges of our time.
  
• Political uncertainty is pervasive in many countries, including Germany, France and Austria.
  
• Donald Trump's aggressive trade policy threatens to further weaken Europe's already ailing industry sector.
  

The fact that the European equity market has risen so strongly despite the negative sentiment may indicate that much of the pessimism and uncertainty has already been priced in. Another reason for the positive performance of European equity indices could be the international orientation of many European companies. After all, many leading companies generate a large proportion of their sales outside Europe. This means that some of these companies are more dependent on the global economy than on the European economy.

If the market is rising so strongly even in the face of negative sentiment, what will happen when sentiment suddenly starts to improve? In any case, the recent rally in European equity markets is encouraging. However, investors should be aware that the hope for better (or less bad) news alone is unlikely to be enough to sustain further gains. Moreover, not all market segments in Europe are cheap. For example, growth stocks in Europe even look expensive when compared to their 20-year history. On the other hand, we believe that European value stocks still offer attractive opportunities. Here, we think the potential for positive surprises is particularly high if sentiment starts to improve gradually.

Related funds:

M&G (Lux) European Strategic Value Fund

M&G (Lux) Global Maxima Fund

M&G (Lux) Global Artificial Intelligence Fund