A global market rout continued on Tuesday as investors reevaluated the high valuations and dominance of AI giants, triggered by the emergence of a low-cost Chinese artificial intelligence model. The selloff, which started on Monday, saw Japanese technology shares particularly hard-hit, following the launch of DeepSeek, a free AI assistant by the Chinese startup. DeepSeek claims to use significantly less data and offers a more affordable alternative to current services, raising alarms across the tech sector, report ‘Reuters’, ‘Investing’.
Shares of Nvidia, a leading figure in the AI boom of recent years, were a major contributor to the market downturn, falling by 17% on Monday alone. This plunge wiped a staggering $593 billion from the chipmaker’s market value, marking a record one-day loss for any company. DeepSeek’s free AI model, which emerged last week, captured worldwide attention, despite some lingering skepticism. OpenAI CEO Sam Altman, known for overseeing the development of ChatGPT, described DeepSeek's model as "impressive" but reiterated confidence that OpenAI would deliver superior models in the future, embracing the arrival of a new competitor.
The growing popularity of DeepSeek has caused a ripple effect, prompting a global selloff in tech stocks. The effects were felt from Tokyo to Amsterdam and Silicon Valley. Notably, markets in South Korea and Taiwan are currently closed for the Lunar New Year, while mainland China remains shut until February 4, leaving Japanese firms in the spotlight.
In Japan on Tuesday, shares of chip-testing equipment maker Advantest, a supplier to Nvidia, dropped 10%, following a nearly 9% fall on Monday. Other technology companies such as chip-making equipment manufacturer Tokyo Electron and investor SoftBank Group also experienced significant losses, slipping 5% each. Kei Okamura, a portfolio manager at Neuberger Berman, pointed to a familiar pattern in Japan’s market, noting that the selloff was reminiscent of previous global market meltdowns, including one in August that saw Japan's Nikkei index take a major hit.
In the United States, semiconductor giant Broadcom saw its stock plummet by 17.4%, while major players like Microsoft and Google parent Alphabet dropped by 2.1% and 4.2%, respectively. The Philadelphia Semiconductor Index took a deep dive, falling 9.2%, its steepest percentage decline since March 2020.
The selloff has brought attention to the crowded positioning of investors in tech stocks, particularly those pouring billions of dollars into AI development. The massive valuations of these firms now seem more precarious, especially as investors grapple with the question of whether these companies can live up to their sky-high expectations.
David Bahnsen, chief investment officer at The Bahnsen Group, highlighted the core issue: "What makes Monday's tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error." He noted that the concentration of tech stocks in investor portfolios and the market indices posed a significant risk that many had overlooked.
The meteoric rise of AI-driven stocks has been a major factor in inflating the broader stock market, contributing to record highs and adding roughly $10 trillion to the market value of major tech firms since the launch of ChatGPT in November 2022. While chipmakers and tech companies dominate the AI narrative, even companies focused on data centers, such as Malaysia’s YTL Power, felt the heat, with its stock dropping 9% on Tuesday following multiple days of significant losses.
Many investors, including Okamura, have expressed uncertainty about how to proceed, scrambling for more information on the potential long-term impacts of DeepSeek’s arrival. Okamura noted that technological advancements like this could have major implications for future cost structures and spending patterns in the industry.
The focus now shifts to upcoming earnings reports from major tech companies, with analysts expecting executives to address the concerns surrounding AI capital spending and market conditions. Investors are eager to hear reassurances from industry leaders as the race to dominate the AI sector intensifies.
DeepSeek, the Chinese startup behind the AI model that triggered this market reaction, remains largely under the radar. Its controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, according to records. The company’s DeepSeek-V3 model, launched on January 10, uses Nvidia's lower-capability H800 chips for training at a reported cost of less than $6 million. The affordability and efficiency of DeepSeek’s model have sparked concern, as it contrasts sharply with the previously accepted narrative that Chinese AI companies lagged years behind their U.S. counterparts.
In light of DeepSeek’s success, U.S. President Donald Trump called the development a "wake-up call for our industries." Japan’s digital minister, Masaaki Taira, echoed this sentiment, noting that the idea that Chinese generative AI was five years behind had been proven wrong. Taira added that Japan was now reassessing the potential cost-effectiveness of Chinese AI technologies, given their impressive performance in the market.
As the global tech sector grapples with these developments, the focus will likely remain on how established AI giants like Nvidia, OpenAI, and others adapt to the challenges posed by emerging competition, particularly from cost-efficient models like DeepSeek.
Bd-pratidin English/ Jisan
