The question posed by the potential erosion of US leadership and the scale of barrier to entry in this arena has created numerous ripple effects for markets.
A change in leadership in the US market
With the FT Wilshire delivering a 3.1% return in January the notable underperformance came in the technology sector with Nvidia significantly impacted by the DeepSeek news. While the aggregate Mag 7 stocks delivered a -1.7% return in January, the ex-Mag 7 index delivered a return of +3.2% helped by the contribution from the financials, healthcare, consumer goods and industrial sectors.
Exhibit 1: Mag 7 underperformance lead by Nvidia and…
Exhibit 2: … a rotation from Growth to Value style
The outperformance of European equities
European equities outperformed in January. A significant contributor to this was the assessment that the DeepSeek impact on the European technology sector was not nearly as material. In fact the European tech sector posted positive returns in January.
Exhibit 3: An inflection in European equity relative performance
A rotation in US REIT sectors
In January the FT Wilshire US REIT index saw a positive rotation into the Industrial and Healthcare sectors and a rotation out of the Digital Information, Services and Storage sector as investors weighed the impact DeepSeek could have on data storage demand.
Exhibit 4: REIT sector performance in January
The potential erosion of US dominance in AI development sapped strength from the US dollar
The DeepSeek news contributed to profit taking in the US dollar. This in turn contributed to the decline in the 10-year bond yield in the latter part of January
Exhibit 5: The connection between the US doilar and US bond yields
