The big driver of the global equity market returns during 2024 was the dominance of US-listed technology-focused megacaps. Up until last week, the ‘Magnificent Seven” of Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, and Tesla had accounted for nearly 60% of the gains of the S&P 500 Index over the previous two years. Indeed, Nvidia’s most recently announced 12-month earnings – totalling around $63 billion – is around half that of all the listed companies in the UK, Germany and France combined.1
A new era for AI technology?
A few days ago most people had probably never heard of DeepSeek, an AI-focused app from a Chinese technology company, but it has rapidly become the top downloaded app on the Apple app store. What’s especially notable is that DeepSeek’s AI model is free to use, appears to produce reliable outputs comparable with US peer models and seemingly at a fraction of the cost. Through the use of less microchips, DeepSeek’s technology demonstrates the potential for a more affordable build out of AI integration.
The stock market impact of this was immediate and dramatic, with the share prices of many of the Magnificent Seven falling sharply, particularly Nvidia which saw almost $600bn wiped off its market capitalisation as investors digested the disruptive innovation potential of DeepSeek’s technology.
The computing power used by previous AI models requires a vast amount of energy to run; for example the CEO of Microsoft said last month in an interview that he “is power constrained, not chip constrained”. DeepSeek’s most eye-catching innovation is being able to deliver comparable results using less of the higher power computing chips. If the DeepSeek design delivers the disruption that the stock market moves suggested yesterday to be possible, then this could accelerate the adoption of AI considerably.
Defensive diversification amid uncertainty
Our Global Leaders strategy currently has zero weighting to the Magnificent Seven, offering diversification away from this small basket of stocks.
The strategy’s defensive diversification away from AI was last seen in July, when US job data came in weaker than previously expected, causing concern that the US economy may be vulnerable to recession. This economic lens initiated an investor retreat out of big tech companies as peak share price valuations appeared stretched.
The volatility in the Magnificent Seven comes on top of a period of escalation in geopolitical tensions over recent months. Q4 2024 saw deep uncertainty surrounding the destabilisation in the Middle East, the toppling of the Assad regime in Syria, conflict escalation in Ukraine, political instability in Europe including a vote of no confidence in the French Prime Minister, as well as Remarkable events in South Korea where martial law was called and overturned over the course of just 12 hours.
All these factors help reinforce our strong conviction that diversification, defensiveness, and economic resilience are important to long term investing.
We continue to view the affordability of debt as an ongoing concern for the economy, both at a consumer and a commercial level, with warning signs visible in higher debt delinquencies such as consumer credit card defaults at the highest they have been in the US since 2010. We also see fragility in the Purchasing Managers Index, which is an indication of optimism about the economic outlook, as well as increasing numbers of unemployed and decreasing job vacancies at a time when consumer savings have decreased to levels not seen since the Global Financial Crisis.
Our longstanding view is that companies with strong balance sheets, robust cash flow generation and durable franchises should be well placed in a market environment defined by economic and political uncertainty and deep concentration risks in the global markets.
We continue to follow our process, to invest for the long term, identifying companies with leading and resilient business models, with alignment to positive social and environmental real-world outcomes.
Strategy specific risks
- Company shares (i.e. equities) risk: The value of investments can go down as well as up as a result of stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.
- Counterparty risk: The risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the strategy's assets.
- Currency (FX) risk: The strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Derivative risk: The strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
- ESG Risks: Investments are selected or excluded on both financial and non-financial criteria. The Fund's performance may differ from the broader market or other Funds that do not assess ESG risks when selecting investments.
- ESG Data: The Fund uses data from third parties (which may include providers for research, reports, screenings and/or analysis such as index providers and consultants) and that information or data may be incomplete, inaccurate or inconsistent.
- Pricing risk: Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
Footnotes
1https://www.reuters.com/markets/us/us-exceptionalism-meets-deepseek-disruption-mcgeever-2025-01-27/
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.