Elise McKay: How equities investors should think about China’s disruptive DeepSeek AI

China’s DeepSeek technology has changed how markets think about AI investing. Pendal’s ELISE MCKAY explains

• Free, open-source AI from China’s DeepSeek surprises markets
• Volatility reinforces case for active management
• Find out about Pendal Horizon Sustainable Australian Share Fund

MARKET volatility sparked by new AI innovations from China underscores the benefits of taking an active approach to portfolio management, argues Pendal’s Elise McKay.

Chinese start-up DeepSeek rocked the tech world last month by releasing an AI model with similar performance to market leaders like OpenAI’s ChatGPT but built at a fraction of the cost.

The free, open-source model was developed without access to the kind of high-end Nvidia graphical processing units that power similar systems.

McKay — an investment analyst and portfolio manager with Pendal’s Australian equities team — says the innovation demonstrates that AI can be trained and run on older, less-powerful chips that are free from US export controls.

It also challenges long-held assumptions that AI dominance requires billons of spending, access to cutting-edge semiconductors, and massive energy use.

The market reaction was swift. Nvidia, the leading supplier of AI chips, dropped 17 per cent in a single session before rebounding 9 per cent the next day as investors grappled with the implications.

“We are early in game for generative AI, so it’s too soon to tell how this will play out,” says McKay.

“But what we do know is that the day-one market reaction is not necessarily reflective of the medium-or longer-term outlook. It is important to look through the noise.”

Need for active management

Market uncertainty about how AI will play out has echoes of the evolution of the COVID pandemic and the impact of GLP1 weight-loss medications such as Ozempic.

“Volatility is a reflection of the unknown — and uncertain situations can create opportunities as we get clarity,” she says.

McKay says the violent market reaction triggered by DeepSeek’s innovation reinforces the need for investors to ensure they are taking an active approach in how their money is managed.

“It demonstrates how the increasing influence of passive money in equity markets is creating these opportunities for active managers,” she says.

“Nvidia was down 17 per cent one day and up 9 per cent. That throws up opportunity for an active manager prepared to take advantage of those kind of liquidity events.”

Transformative technology

Investors can look to the past for hints on how these changes are likely to play out.

McKay points to Jevons’ Paradox – named for English economist William Stanley Jevons who observed that coal consumption increased through the 1800s despite rapid improvements in steam engine efficiency, challenging the belief that improved technology would reduce resource use.

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The argument? More efficient systems are more cost-effective for users, which increases their adoption.

“Same with AI – if it’s cheaper, we’re going to be using more of it,” says McKay.

Economic growth, productivity effects

Greater AI adoption has the potential to lift global growth as businesses and individuals find new ways to boost productivity, says McKay – and falling AI costs could reshape how that value is distributed across society.

“Cheaper AI shifts power away from the handful of hyper-scalers who could previously charge a premium for access. Open-source models mean a wider range of people can use it. It democratises access.”

That could mean a broadening of market leadership away from the Magnificent Seven tech leaders such as Nvidia and Meta.

“Expanding breadth from the Magnificent Seven to the broader tech space is generally good for a bull market continuing, because you need that breath to extend.”

For Australian equities, the impact remains unclear.

“Australia is a reasonably early adopter of technology – particularly cloud computing – so I’m excited to see how Australian companies embrace generative AI.

“It’s still early days, but we’re on the precipice of something exciting.”

About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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