The market disruption created by the emergence of AI model DeepSeek R1 highlights the need to ensure investment portfolios are resilient, according to Schroders.
US markets took a tumble on Monday as news filtered through that a model comparable with America’s best had been created by the Chinese firm for a fraction of the cost of established ones such as Open AI’s GPT 4 and o1.
The firm said the news raised important questions for investors in a market commentary note.
Johanna Kyrklund, group chief investment officer, explained: “We’ve discussed before the dangers that highly concentrated equity markets can pose to investors.
“The level of index concentration now far surpasses that of the late 1990s. From a portfolio standpoint, having such high unintentional exposure to just a handful of companies does not feel prudent. Understanding the underlying stocks is crucial, and an active approach is needed to manage the risks.
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“The full implications of DeepSeek’s technology still need to be understood. But this example highlights that markets are vulnerable to a misstep by one of the large US megacaps, or by the emergence of new competition.”
Kyrklund, added that major equity indices do not offer the diversification they did in the past. Investors wanting to build more resilient portfolios will need to take an active approach, looking across sectors and geographies, to build genuine diversification, she noted.
Turning to the implications for specific companies, Paddy Flood, portfolio manager and global sector specialist for technology at the asset manager, added: “If increased compute efficiency leads to reduced demand for chips/AI equipment, companies like Nvidia and other compute infrastructure providers could face headwinds. However, this outcome is far from certain, particularly given Jevon’s Paradox.
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“On the other hand, this development could prove favourable for software companies. Lower AI costs might make these technologies accessible to a broader base of customers who were previously deterred by high price points.
“For software providers embedding AI capabilities into their products, this could bolster adoption while preserving profitability,” Flood continued.
“Additionally, large hyperscale companies such as Microsoft, Meta, and Google could stand to benefit.”
