Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
In Ernest Hemingway’s The Sun Also Rises, someone is asked how he went bankrupt. ‘Two ways’, he says. ‘Gradually, then suddenly.’ That’s a good description of the way this week’s AI-focused market shock emerged. It might have felt like a bolt from the blue on Monday when Nvidia’s shares crashed 17% in a day, wiping more than $600bn from its market value. But for anyone with their finger on the AI pulse, this was not a new story.
It was the previous Monday, Inauguration Day, that DeepSeek, a Chinese AI start up, unveiled its new large language model to a world more focused on Washington. It took until Friday for stories about the apparent efficacy and low development cost of the new model to hit traders’ Bloomberg screens. It was only over the weekend that the full disruptive potential of the new application went viral on social media. It was a week after the news first broke that the markets woke up to what was going on.
So, the first thing we learned this week was the importance of paying attention. There have been stories circulating about DeepSeek since last summer. It has been acknowledged for some time as one of China’s best hopes in the AI space. But I am sure I am not the only person who knew nothing about the company until Monday morning. Margaret Thatcher made a habit of reading the news in brief stories in the papers on the grounds that they contained the information that even journalists hadn’t yet decided was important. The ‘nibs’ as we used to call them is where the market moving stories - the ones that haven’t yet been priced in - are to be found.
The slow pick-up of the DeepSeek story also shows how hard it can be for investors to let go of a familiar and reassuring narrative. US exceptionalism has become the ‘no brainer’ investment thesis in recent years. It has become even more entrenched since the re-election of Donald Trump. When it becomes impossible to contemplate an alternative reality, investors have arrived at a dangerous place. There are plenty of other ‘obvious’ trades at the moment - a strong dollar, higher for longer interest rates, un-investable China - that could easily, and quickly, look less clear cut.
Three narratives were punctured by DeepSeek this week. First, the belief that Nvidia had built an unbridgeable defensive moat around itself. Such is the computational superiority of its chips, it was thought, that it would continue for the foreseeable future to have a quasi-monopoly position in the training of AI models. Second, that only by spending eye-watering amounts of money can companies compete in the AI space - that helped justify the sky-high valuations of the Magnificent Seven, the only companies that could afford to pay to play. Third, that only the companies that owned the large language models could develop the applications that used them. DeepSeek has blown those myths apart.
Something else we’ve been reminded of this week is the fact that being good for the economy is not the same thing as being good for the stock market. The democratisation of AI promised by DeepSeek is good news in many ways. An open-source AI model that’s cheap to develop is a positive for the global economy but it could be very bad news for the companies that investors had viewed as the biggest beneficiaries. Germany’s Siemens Energy lost 20% of its value on Monday morning.
The slump in Nvidia’s stock this week shows how vulnerable the over-priced, over-concentrated US market had become. The importance of diversification has never been clearer. Consumer staples stocks have now outperformed information technology shares since the Presidential election. Chinese tech stocks have outperformed their Japanese counterparts. While the S&P 500 index fell 1.5% on Monday and the tech-heavy Nasdaq was 3% lower on the day, the equal weighted benchmark, which assigns the same weight to S&P’s smallest constituent as it does to Nvidia, was unchanged.
I did not foresee this week’s gyrations when I made my annual fund picks at the beginning of the year. But I did suspect that a rotation away from the priced-for-perfection Magnificent Seven stocks was underway. The Brown Advisory US Smaller Companies Fund, the Dodge & Cox Worldwide Global Stock Fund and the Fidelity Global Dividend Fund are all, in their different ways - by size, investment style and geographical weighting - an attempt to protect investors from what has happened this week.
- Read: My fund picks for 2025
Losing money is always painful, especially when a market correction comes after two years of rising prices. It is easy to forget that volatility is the price we pay for the long-run outperformance of shares. One of the biggest errors an investor can make, however, is not to use wake-up calls like this week’s as a prompt to revisit their portfolios. It’s an opportunity to look under the bonnet to see what your exposures actually are. You may be quite surprised at how much money you have invested in the likes of Nvidia. Your holdings are almost certainly concealed within a US or global tracker fund, or a default pension selection. Well-hidden maybe, but no different from if you had actually gone out and bought the shares yourself.
Now is a good time to listen to your inner investor too. How does it feel when the value of your investments falls? Is this something you can take in your stride? There will be bigger setbacks than this one in the years ahead. Are you OK with that? Pay attention in the ‘gradually’ phase. You’ll be better placed when the next ‘suddenly’ shows up.
This article was originally published in The Telegraph
Important information - The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA/SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Past performance is not a reliable indicator of future returns. The Brown Advisory US Smaller Companies Fund, Dodge & Cox Worldwide Global Stock Fund and Fidelity Global Dividend Fund invest in overseas markets so the value of investments could be affected by changes in currency exchange rates. The Dodge & Cox Worldwide Global Stock Fund and Fidelity Global Dividend Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Dodge & Cox Worldwide Global Stock Fund invests in emerging markets which can be more volatile than other more developed markets. The Fidelity Global Dividend Fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. This Brown Advisory US Smaller Companies Fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. The Brown Advisory US Smaller Companies Fund and Dodge & Cox Worldwide Global Stock Fund, have or are likely to have, high volatility owing to its portfolio composition or the portfolio management techniques. The Key Investor Information Document (KIID) / Key Information Document (KID) for Fidelity and non-Fidelity funds is available in English and can be obtained from our website at www.fidelity.co.uk. Please note that Tom’s picks and Select 50 are not a personal recommendation for you. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
Share this article
Latest articles
Save in cash or invest? The best home for your ISA money
Staying smart with tax-efficient savings
Retirement plan checklist: 5 years from retirement
Make the most of your tax-efficient pensions and ISA savings
Fundsmith Equity Fund: update from Terry Smith
Underweight exposure to tech has affected performance negatively