DeepSeek’s arrival increases risk for passive investors

The sudden advent of the new AI model DeepSeek increases competition for US Big Tech companies and, with it, the risk of more price corrections. This is a potential danger for index investors, according to investment experts.

On Monday, the arrival of the new AI model DeepSeek sparked panic in equity markets. DeepSeek claims to have developed its new language model spending only a fraction of the money invested by its US competitors Open AI, Gemini and Meta.

Consequently, the share prices of large tech companies, and those of key suppliers such as ASML and Nvidia, fell sharply after the news, even though their prices recovered somewhat in the following days.

Concentration risk

While pension funds, with their extremely long-term investment horizons, can usually ignore stock market ‘noise’, this time is different, according to David Jenkins, portfolio manager, global sustainable equities, at UK pension fund Brunel Pension Partnership.

“The biggest nine stocks in the world (which all happen to be IT stocks impacted by the advent of DeepSeek) represent 24% of global market cap, and this can really cause a massive risk in terms of concentration,” he said in a video message on Brunel’s website.

“There are still bull causes for companies like Nvidia, but investors should be aware of concentration risk, especially when looking at benchmarking and passive investment,” he added.

One Dutch pension fund – Pensioenfonds Huisartsen, the occupational pension fund for doctors – recently switched from a passive investment style to a more actively managed, concentrated portfolio, giving as one of the reasons for the move that it wanted to reduce its equity exposure to the US.

This market has become increasingly dominant in recent years, precisely because of the rise of AI. Nienke Kuppens, responsible for sustainable investing at the pension fund, said she had followed last week’s stock market developments “with interest”.

“We think this is an example of the potential risks involved in index investing,” Kuppens said, although she added that no conclusions can yet be drawn from the share price reaction to DeepSeek.

More active investing

Schroders’ chief investment officer Johanna Kyrklund had fewer qualms about the situation. She said: “The major equity indices no longer provide the diversification they used to. Investors who want more resilient portfolios therefore need to invest more actively and look more at allocations to different sectors and countries to create truly diverse portfolios.”

Karen Kharmandarian of asset manager Thematics Asset Management raised the question of whether a revaluation of Big Tech is inevitable due to the sudden rise of DeepSeek. Current high valuations make big tech companies vulnerable, he argued.

“Investors who up until now have mainly looked at the question of which tech giants are pumping most resources into AI should ask themselves whether economies of scale still provide sufficient protection. This could mean a reappraisal of the AI sector,” he said.

Jevons paradox

Where investors initially reacted negatively to the unexpected Chinese competition, this knee-jerk response quickly reversed to positivism. The explanation for this is the so-called Jevons paradox; after the English economist William Stanley Jevons, who noted in the 19th century that consumption of a product increases rather than decreases if less of it is needed to produce the same amount of the final product.

Up until now, investors’ focus has been very much on the construction phase of AI. But with DeepSeek, AI becomes available for many more applications.

“That could actually lead to additional investment and more demand,” said Roelof Salomons, investment strategist at BlackRock. But it will be the users of AI applications, rather than the makers of AI hardware such as Nvidia, Alphabet and ASML, who stand to benefit.

Big winners

Raj Shant of asset manager Jennison Associates already signalled this trend late last year, talking to IPE’s sister publication Pensioen Pro.

“The big winners of the future will be companies developing software applications for AI,” Shant said at the time.

Investors seem to agree with him. The iShares AI Infrastructure ETF, which includes companies such as Nvidia, ASML, Amazon, TSMC and Microsoft, posted a return of around 0% in the first month of 2025.

In contrast, the same provider’s AI Adopters & Applications ETF launched in December last year has returned +6%. That is about twice the return of the MSCI AC World Index. Besides IT companies, this iShares ETF also includes many companies from the healthcare and financial sector, such as Pfizer, JP Morgan and Visa.

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