The week that was …
Economic round-up
* Chancellor Rachel Reeves outlined her plans to promote growth in the UK economy, promising to go “further and faster” than previous governments. Proposed measures included a new runway for Heathrow, a manufacturing and logistics park in Manchester and a new rail line between Oxford and Cambridge. Read more in ‘In focus’ below
* UK wages continued to show robust growth in the three months to the end of November, rising 5.6%, although there was a decline of 47,000 in the number of people in work. The number of job vacancies fell for the thirtieth consecutive month. Read more from iNews here
* US GDP grew at an annual rate of 2.3% in the final three months of 2024 – a drop on the previous quarter’s pace of 3.1% and below the 2.6% growth expected by economists. The Federal Reserve said the economy “continues to expand at a solid pace” and kept rates on hold. Read more from the Guardian here
* US core PCE inflation held steady at 2.8% in December, in line with economists’ expectations. The index, which excludes volatile food and energy prices, was the same as November’s reading. Read more from FX Street here
* The Eurozone economy stagnated in the final quarter of 2024, with consumer spending a particular weak spot. GDP was unchanged quarter on quarter, against economist expectations of a rise of 0.1% across the 20 nations. The ECB cut rates another quarter-point to 2.75%, widening the gap between the Eurozone and the US. Read more from Reuters here and from Morningstar here
* China’s factory activity in January unexpectedly contracted, reversing the growth seen in the previous three months. The official purchasing managers’ index for January came in at 49.1, compared with Reuters poll estimates of 50.1. Read more from CNBC here
* US president Donald Trump on Saturday (1 February) signed an executive order imposing tariffs on its largest trading partners. Mexico and Canada were hit with a 25% tariff on goods entering the US, while China will suffer 10% on imports. These are set to come into effect on Tuesday 4 February. Read more from Reuters here
Markets round-up
* Shares in Nvidia slumped almost 20% in a single day after the release of the Chinese AI model DeepSeek. The new offering provides similar functionality to existing AI models, but created at a fraction of the price and running on fewer, less powerful chips. Read more in ‘In focus’ below
* Apple shares rose more than 8% on the news it marginally beat analysts’ expectations for its first-quarter earnings for fiscal year 2025. The group saw revenues rise 4%, coming in at $124.30bn. Read more from the Guardian here
* The FTSE 100 hit new highs, with defence and energy stocks propelling the market upwards. The UK market successfully negotiated GDP, inflation and interest rate data over the week. Read more from AJ Bell here
“Investors need to balance worries over over-concentration against the fear of missing out on future gains in the tech space. The speed with which the Nvidia growth story been disrupted in the space of a week should be a reminder to err in favour of greater diversification.
Selected equity and bond markets: 24/01/25 to 31/01/25
Market 24/01/25(Close) 31/01/25 (Close) Gain/loss
FTSE All-Share 4617 4711 +2.04%
S&P 500 6101 6040 -1.00%
MSCI World 3856 3863.5 +0.20%
CNBC Magnificent Seven 352.2 348.1 -1.20%
US 10-year treasury (yield) 4.634% 4.541%
UK 10-year gilt (yield) 4.640% 4.539%
Investment round-up
* The FCA has announced plans to open up the corporate bond market to retail investors. In a move intended to support economic growth, companies would be allowed to issue debt in smaller sizes and the disclosure requirements for companies issuing bonds worth less than £100,000 each would be reduced. Read more from the FT here
* The UK’s largest wealth manager St James’s Place attracted £4.3bn in new money over 2024, bringing its total assets under management to a record £190.2bn. The last quarter of the year was particularly strong and significantly ahead of expectations. Read more from CityAM here
* The AIC launched a campaign to ensure all shareholders can exercise the right to vote on their shareholdings. The ‘My share, my vote’ campaign has come in the aftermath of attacks from activist investor Saba Capital, which has highlighted poor practices on voting across some investment platforms. Read more from the Armchair Trader here
… and the week that will be
Tariff mania
Any investors hoping for a short pause in the executive orders emerging from the White House will have been disappointed as Donald Trump announced 25% tariffs on Mexico and Canada, plus a 10% tariff on China, with effect from Tuesday (4 February). All three countries announced immediate retaliatory tariffs. In a post on social platform Truth Social, the US president acknowledged there may be some pain but added: “It will all be worth the price.” US citizens may be unconvinced, however, with economists warning the introduction of import taxes, and the responses from other countries, could lead to prices rising across a wide range of products. Read more from the BBC here
UK interest rates
In spite of the re-emergence of inflationary pressures, the Bank of England is widely expected to cut rates this week, bringing the benchmark Bank Rate down to 4.5%. Bond markets are likely to pay close attention to the commentary given by the Bank on the outlook for the rest of the year. Expectations are for a gradual and data-dependant approach. Read more from CityAM here
The week in numbers
Eurozone CPI: Consensus forecasts Eurozone inflation will fall to 2.3% year on year.
US ADP employment report: Consensus expectations are for 115,000 jobs created in January, down from 122,000 the previous month.
US non-farm payrolls: Consensus expectations are for 205,000 jobs created last month, down from 265,000 in December. The unemployment rate is expected to hold at 4.1%, while wages are expected to have increased 3.9% year on year
BoE rate decision: Consensus expectations are for rates to be cut to 4.5% from 4.75%.
Company results: Companies reporting results this week include Alphabet, Amazon, Pfizer and Walt Disney.
In focus: ‘DeepSeek v MagSev’
The launch of Chinese AI model DeepSeek last week sent shockwaves through the US technology giants. The new entrant had been built at a fraction of the cost and requires far lower computer power than its US competitors. It proved particularly destabilising for Nvidia, where it threatened demand for its expensive semiconductor chips – and yet DeepSeek is not necessarily bad news for all artificial intelligence-related stocks.
DeepSeek would appear to have similar functionality to the existing AI models in the US – albeit with some censorship imposed by the Chinese state. Politically-sensitive topics such as Tiananmen Square and the ownership of Taiwan are glossed over, for example. The key, however, is that the model has been trained at a fraction of the cost of US equivalents – just $5.6m (£4.5m) according to the company itself.
“DeepSeek has disrupted the AI narrative that has prevailed in markets in terms of reliance on high-end semiconductor chips, extensive computing power, high energy intensity and the need for significant capital expenditure and operating expenses to run AI models,” said Anthony Willis, an investment manager at Columbia Threadneedle.
“While the open structure and lower energy intensity of DeepSeek may ultimately mean the AI industry is bigger, with a wider positive impact on productivity, in the short term it has unsettled long-held assumptions over the ‘winners’ from the AI revolution.”
There are caveats here, though. As Karen Kharmandarian, a portfolio manager at Thematics Asset Management, pointed out, there is very little concrete information regarding the accurate training costs of DeepSeek’s model. “Some market participants suggest the company may have a cluster of 50,000 Nvidia H100 GPUs, which would push the investment into billions of dollars,” he said. “Without even considering the salaries of engineers working on the project, the $6m figure seems highly questionable”. ChatGPT has also suggested its own models may have been used to train the algorithm.
Equally, if DeepSeek promotes broader adoption of AI by making it cheaper and more widely available, it may increase the amount of computing power that is needed, even if it is more efficient. This phenomenon is known as Jevon’s Paradox, which suggests that improvements in resource efficiency will often drive greater consumption of that resource.
Nevertheless, it is an unsettling development for investors and Nvidia’s share price dropped around 20% on the day DeepSeek was revealed. The share price has staged a small recovery since but is now down 11% since the start of the year. Christophe Fouquet, chief executive of ASML, said DeepSeek was good news for AI adoption but he expected similar shocks in the coming months or years. Quoted in the Financial Times, he said: “You cannot have an industry with this amount of opportunity without the key players being challenge. I don’t think you can define today who is the winner in 2030’.
Part of the problem is that few people had questioned Nvidia’s sector dominance – all attention had been on the ‘picks and shovels’ makers of the AI revolution, in the absence of a ‘killer app’ that would justify AI spending.
“AI infrastructure – companies like Nvidia and other infrastructure providers – have seen significant gains over the past two years,” said Tomasz Godziek, portfolio manager of the Tech Disruptors fund at J. Safra Sarasin Sustainable Asset Management. “This breakthrough raises new concerns about the sustainability of high infrastructure spending.”
He went on to note, however, that AI beneficiaries could see a potential reduction in AI costs, which could accelerate adoption, benefiting software and consumer internet companies that integrate AI into their products, adding: “The hyperscalers – Microsoft, Amazon, Alphabet and the Chinese cloud giants – stand to benefit from increased AI inference and broader AI adoption. If research advances allow AI models to be developed with fewer resources, hyperscalers could also see reduced capital expenditures, alleviating investor concerns.”
Godziek argued software companies would ultimately be the most significant winners, observing “For infrastructure software – so databases, search, cybersecurity and so on – more AI activity should drive greater usage of these platforms. With application software, meanwhile – process automation, data analytics, marketing software and so on – lower AI costs could accelerate adoption, enabling software firms to integrate AI more affordably without significant margin pressure.”
This would be welcome. According to Jamie Mills O’Brien, manager of abrdn Global Innovation Equity Fund, AI tools remain “solutions in search of a problem”. “Artificial intelligence needs a ‘why’, just as the internet did,” he says. “The focus has largely been on increasing the number of GPUs in advanced clusters in order to train the most powerful models possible. DeepSeek could now enable greater competition by allowing more participants to develop custom AI models.”
Mills adds: “The increased democratisation of AI can drive greater uptake among end-users, sustaining the demand for increased processing power in the operational phase of the AI model lifecycle. The continued demand for processing power maintains a broadly constructive outlook for players in the semiconductor, data centre and utility space.”
In this respect, the arrival of DeepSeek may accelerate rather than stall growth for some of the US AI companies – although it does illustrate that disruption is alive and well. The US market is now highly concentrated relative to its history, with 36% of the S&P 500 index weighting in the top 10 holdings, and 31% in information technology. Investors need to balance worries over over-concentration against the fear of missing out on future gains in the tech space. The speed with which the Nvidia growth story been disrupted in the space of a week should be a reminder to err in favour of greater diversification.
Read more on this from the FT here, from Reuters here and from Premier Miton here
In focus: ‘UK targets growth’
UK chancellor Rachel Reeves has been in Davos, delivering a pro-growth message that the UK is ‘open for business’. Her growth agenda took in a range of high-profile building projects, including the controversial third runway at Heathrow, plus new infrastructure development, an Oxford/Cambridge corridor and changes to the pension rules to encourage investment in the UK. She also shifted her position on ‘non-dom’ taxation, after data showed wealthy people were leaving the country.
Reeves also ousted Marcus Bokkerink, the chair of the Competition & Markets Authority, the UK’s competition watchdog, saying the government wanted to send a signal it was serious about growth; and intervened in a UK Supreme Court hearing on motor finance commission – which may or may not have been connected to Santander threatening to leave the UK. There had been fears over the economic consequences should the commission rules make car finance less obtainable and more expensive.
Market-watchers pointed out most of the growth projects were long-term in nature and thus unlikely to create any immediate bounce in the UK economy. “The investment outlined is for the long term, not the short term,” noted Neil Birrell, chief investment officer at Premier Miton Investors.
“The measures announced by the Chancellor are unlikely to kickstart economic growth – however, they may well provide growth for the longer term that subsequent governments will reap rewards from. Short-term stimulus and immediate wealth generation, which the economy could do with, comes from looser fiscal policy and business conditions. Furthermore, sentiment needs to be bolstered, which this speech might help.”
The one area where there might be an immediate impact was around changes in the rules on how defined benefit pension schemes can invest pension surpluses. “This idea builds on previous government efforts and aims to use these surpluses to fuel economic growth by investing in key infrastructure projects and productive assets,” explained Lindsay James, an investment strategist at Quilter Investors.
“The concept of surplus extraction is not new – it was discussed as part of the government’s Mansion House reforms and was considered a way to redirect funds from overfunded pension schemes to support broader economic needs – however, the challenge has always been to strike a balance between unlocking these funds for growth and ensuring pension members’ benefits are protected. With Labour’s backing, there is now a clearer focus on identifying eligibility criteria for schemes to release surpluses without jeopardising the financial security of retirees.”
Statutory restrictions on pension scheme rules have hindered the use of surpluses in the past but, said James, Reeves’s proposals aimed to address these concerns by offering more clarity and guidance for trustees, which should give them the confidence to release funds. “Not only could it provide vital capital for infrastructure projects that could stimulate economic growth,” she added, “it could also allow pension schemes to achieve better investment outcomes.”
Read more on this from Jupiter here, from Premier Miton here and from the Times here
