Investment Navigator Asia February 2025
How is the AI race shaping up? (1/2)
WHAT IS THE RETURN ON INVESTMENT ON AI?
The launch of open source DeepSeek caused a huge sell-off in semiconductor hardware names in January 2025. The bigger story here is the commoditisation of AI – that more and cheaper AI models and algorithms provide a more cost-effective route for companies to embed AI-enabled processes into their businesses.
There is a growing possibility of an AI capex slowdown in 2025, particularly when we compare to the 50-60% growth seen in 2024. Recently, we have seen some Magnificent 7 companies upgrade in their capex outlook, even after some disappointments in cloud revenues estimates. The crucial question going forward is regarding the ROI on AI. This has echoes of the Metaverse narrative a couple of years back. Hence, these companies are under pressure to deliver revenue growth in coming quarters to justify the capex spend.
How is the AI race shaping up? (2/2)
According to the Jevons Paradox, as technological improvements increase the efficiency of resource use, the overall consumption of the resource tends to increase (not decrease) as demand increases sharply. Cheaper leading-edge AI models should accelerate their adoption in the wider economy, driving productivity gains across sectors and driving even faster growth in electricity demand. Whether this occurs will be keenly watched by markets.
WHO ARE THE WINNERS FROM THIS AI DRIVEN NARRATIVE?
"The big winners from this next stage in the AI development cycle will not necessarily be the Magnificent 7, but rather companies that can drive significant AI-related productivity benefits in the financial, health care and software sectors."
AI commoditisation should also spur the development of a new wave of businesses and industries, as seen with the widespread adoption of mobile internet and smartphones. With a possible drop in training costs and a movement to inference and reasoning and super agents could favour software over hardware as well within technology.
Revenge of the Tariff Man!
HOW ARE TRUMP’S TARIFFS AFFECTING THE MARKETS?
The announcement of higher US trade tariffs confirms our key assumption that Donald Trump’s campaign promises should be taken literally and seriously. In fact, the announced increases in tariffs were even larger and came faster than we had predicted. The most recent being talked about is a 25% tariff on all imports of steel and aluminium into the US, as well as new reciprocal tariffs. We had initially thought that tariffs would be hiked gradually.
In our view, President Trump announcement of such high tariffs is either to a) put maximum pressure on upcoming negotiations, or b) to earmark the revenues to reduce the budget deficit by rerouting supply chains.
Interestingly, President Trump’s opening salvo with regards to tax has resulted in early wins with regards to illegal immigration and fentanyl with Mexico and Canada enacting measure to combat these areas. At the same time, the US admin will now engage both countries with regards to trade issues, and that will be key for markets.
Tit for tat tariffs can be expected, albeit the recent “pause” on tariffs will allow time for further negotiations with the respective countries. Furthermore, the first stage of tariffs enacted on China was only 10%, much lower than expected. Overall, we believe a moderate level of tariffs are more likely for the present. If the announced level of tariffs are ultimately maintained (not our base case), we expect a -0.4% drag on the US economy and +0.8% on core inflation, with Mexico and Canada likely slipping into recession. Hence this is precisely why a negotiated outcome is much more likely.
AMIDST THE VOLATILITY, WHERE CAN WE FIND OPPORTUNITY?
Given our base case of moderate tariffs or trade deals to avoid tariffs, any growth and inflation impacts should be relatively limited. Nevertheless, risks remain.
Hence we continue to advocate diversifying across sectors and markets globally. We remain overweight EU financials, and global health-care, industrials, and materials. Technology is an underperforming sector year-to-date in the S&P 500. For example, European banks have outperformed the Magnificent 7 since January 2022. Furthermore, we favour Japan, UK, and China equities.
