Undoubtedly the vexing question this week was whether a hedge fund-backed Chinese AI startup had punctured the technology stock market bubble, with news about a hyper-efficient new AI model from China’s DeepSeek sending Big Tech stocks tumbling at the start of the week.
It seems like no coincidence that this news broke amid US and China Trade tensions. In fact, DeepSeek was launched on President Donald Trump’s inauguration day. DeepSeek is a free, open-source large language model that other companies and organisations can freely use to build AI apps. The company said it took only two months and less than $6 million to build. Within days of its release, DeepSeek’s chatbot was the most downloaded app on Apple’s App Store.
Nvidia alone lost $ 593 billion in market capitalisation on Monday, the largest ever single day drop for a US company, as markets digested the implications. Nvidia’s one-day decline, according to CNBC, was more than double the market cap of Coca-Cola and Chevron and exceeds the market value of both Oracle and Netflix.
The reason that DeepSeek caused such panic is that its efficient “R1” and “v3” models for generative AI brought into question whether American AI companies would continue to lead innovation in the sector. It raised concerns that its technology would shred the value of big AI players by dramatically reducing the costs of AI development and deployment.
DeepSeek’s technology – cheaper and in some ways superior to US firms like OpenAI and Meta – raises questions about whether China or the US will emerge as the world’s AI superpower. The startup, prevented from using cutting-edge chips by US export controls, focused on creating smarter models that require less computing power.
The notion that DeepSeek can go toe-to-toe with the likes of Open AI (backed by the likes of Microsoft and Oracle) at a fraction of the cost caused markets to question the market valuations of Nvidia and cloud computing providers. This is because the bull investment case for these companies rests on AI driving massive demands for computing power.
Yet this doesn’t necessarily undermine the AI investment case. Instead, cheaper AI models may cause exponential growth in consumption, in turn dramatically growing the value of the overall market. This is the Jevons Paradox – when improvements that increase the efficiency of a resource lead to a higher overall consumption of that resource.
Jevons used his paradox to explain how more efficient steam engines reduced coal consumption per unit of work. This made coal-powered machinery more economical and widespread, leading to an overall increase in coal consumption. The concept applies equally to how cheaper PCs, smartphones, and cloud computing have transformed our lives.
We see similar effects for AI, given that we are just in the early stages of adoption. Not only will companies like Microsoft, Apple, and Google create value by infusing it into their consumer products, but generative AI may create massive gains in efficiency and productivity for companies in every sector.
We thus remain positive about the growth of the tech industry, even as we remain mindful of the concentration and valuation risk of the Magnificent Seven stocks in the broader global market indices.
“As a rule, new modes of economy will lead to an increase in consumption.”
– Victorian-era English economist, William Stanley Jevons
“Jevon’s paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of.”
– Microsoft CEO, Satya Nadella
Global News
- OpenAI, ChatGPT owner, has complained that Chinese rival DeepSeek is using its work to make rapid advances in developing its own AI tools. Both Microsoft and OpenAI are investigating whether OpenAI’s data was illicitly obtained by DeepSeek, according to sources. DeepSeek claims to have built its base model for less than $6 million versus the more than $100 million OpenAI spent on GPT-4. Sceptics suggested DeepSeek had access to more advanced chips and more funding than it has acknowledged.
- Nvidia shares sank 17% Monday – the biggest one-day market cap loss for a single stock in history. Alphabet, Microsoft, Oracle, TSMC, and others also lost ground on the day. Nvidia regained 9% on Tuesday. Meta shares were, however, unscathed after the rout. Although profits from the Magnificent Seven are still rising, far outpacing the rest of the market, growth is projected to come in at the slowest pace in almost two years.
- Trump’s second trade war is shaping up to be different from his first. The president’s ambitions for a reordering of world commerce are broader. The opposition – at home and abroad – is weaker. And the economic risks he seems prepared to run may be greater. He has issued tariff threats at just about every significant US trading partner following his recent inauguration writes the Washington Post’s David J Lynch.
- The Trump administration announced on Tuesday that approximately two million federal workers would have the option to resign while still receiving their salaries through to the end of September. This move aims to significantly reduce the federal workforce and remove individuals who do not align with Trump’s political agenda. Many federal agencies are expected to downsize, with a considerable number of employees facing furloughs or being reclassified as “at-will,” making them more susceptible to termination.
- As the Fed voted unanimously to keep the interest rate in a range of 4.25%-4.5%, chairman Jerome Powell said officials are not in a rush to lower the rate, adding the central bank is pausing to see further progress on inflation following several rate reductions last year. He indicated the economy remains strong, and interest rates are no longer restraining growth as much as they had been. The Fed dropped rates cumulatively by a full percentage point in the final months of 2024.
- More than 40% of the roughly seven million people looking for work in the US have been searching unsuccessfully for at least 15 weeks, according to the Bureau of Labor Statistics data published on Tuesday. This is a number rarely seen in the post-World War Two era until the global financial crisis of 2008 and is one more indication that the hot job market that prevailed during the pandemic-reopening boom of 2022 and 2023 is now gone. A weaker jobs market tends to soften inflation, which is supportive of lower interest rates. As stated in previous publications, interest rate directionality is a key driver of market movements. Ironically a weaker economy may be better for equities markets than a strong economy with high interest rates.
- The gold price reached a new all-time high on Thursday of $2,796, eclipsing October 2024’s high of $2,785, which occurred days before Trump’s election sent the dollar soaring and the gold price to give up 8% of its gains. Interestingly, the dollar has fallen slightly since Trump’s inauguration last week but was not the cause of gold’s spike.
- SoftBank Group is in discussions to invest as much as $25 billion in OpenAI, a move that would potentially make it the AI startup’s biggest backer. The Japanese investment company is in talks to put in between $15 billion and $25 billion, according to sources. That would be in addition to the $15 billion that Masayoshi Son’s SoftBank has committed to Project Stargate, the Texas-based joint venture with OpenAI to build data centres and other AI infrastructure to support the ChatGPT maker.
- Meta’s earnings beat Wall Street’s revenue expectations in the fourth quarter of 2024, with sales up 20.6% year-on-year. Its profit per share was 18.7% above analysts’ consensus estimates. However, next quarter’s revenue guidance is 2.4% below analysts’ estimates. Its AI assistant, Meta AI, should reach one billion users this year. Trump has settled a legal dispute with Meta for $25 million over the suspension of his accounts after the 6 January 2021 Capitol riots.
- Microsoft said on Wednesday that its cloud-computing business will continue to grow slowly in the current quarter as the company struggles to build enough data centres to handle demand for its AI products. The shares fell about 5% in extended trading. According to Trump, Microsoft is in talks to acquire the US arm of ByteDance’s TikTok. Microsoft declined to comment on his statement, which came without additional details.
- Apple’s upbeat revenue forecast for the current quarter lifted shares, despite declines in iPhone sales and weaker performance in China during the holiday season. The company projected sales growth in the low- to mid-single digits, roughly matching analysts’ expectations of around 5%. While the quarterly report showed mixed results, the forecast helped restore investor confidence. Apple’s shares rose more than 3% in late trading, recovering from a 5.1% decline earlier this year.
- IBM shares jumped 12% after the company projected strong revenue growth and $13.5 billion in free cash flow for 2025, surpassing expectations. AI-related bookings exceeded $5 billion, driven largely by consulting. As part of its shift toward high-growth software and services, IBM continues to expand through acquisitions like Apptio and the proposed HashiCorp deal.
- SAP reported fourth-quarter cloud sales that slightly beat analysts’ expectations, as Europe’s biggest technology company grew customers thanks to its AI capabilities. The company also named a suite of new executives and said it plans to simplify its strategy while raising its 2025 cloud revenue outlook. Cloud revenue in constant currencies rose 27% from a year earlier. Shares rose as much as 3.1% to reach an intraday record on Tuesday on the news.
- Dutch semiconductor giant ASML on Wednesday reported a big jump in fourth-quarter net bookings, which suggests solid demand for its advanced chipmaking tools despite DeepSeek’s low-cost model raising concerns over AI spending. ASML shares surged as much as 11% during morning deals but later pared gains later in the day to close 5.6% higher.
- As at Thursday’s close the S&P 500 was 0.26% higher for the week, despite Monday’s DeepSeek-led sell-off.
Local News
- The Reserve Bank cut interest rates by 25bps yesterday as inflation eased but maintained a hawkish stance amid heightened global uncertainty over US monetary policy. The decision aligns with expectations that the Bank would take a cautious approach as it assessed external threats and potential inflationary pressures. This is the third successive reduction since September 2024 and takes the repo rate to 7.5%.
- DA leader John Steenhuisen reiterated the party’s commitment to the Government of National Unity hours before discussions with President Cyril Ramaphosa on Tuesday to iron out the contentious issue of its influence on legislation passed during the previous administration. The meeting took place before Wednesday’s cabinet lekgotla, and days after Ramaphosa signed the Expropriation Bill into law.
- Coronation says that runaway municipal debt presents a risk of further bailouts for Eskom, while National Treasury may also find it difficult to follow through with its commitment in the medium-term budget policy statement not to bail out cash-strapped Transnet.
- A financial bailout of Transnet, to capacitate it to its full potential as proposed by the ANC’s Economic Transformation Committee over the weekend would, while necessary, must be carefully implemented with a clear strategic focus, industry stakeholders said on Monday. Transnet requires a similar package to the R254 billion guarantee given to power utility Eskom in 2023.
- Eskom was set to face a rigorous examination before the Portfolio Committee on Electricity and Energy today to explain dismal findings presented by the Auditor-General, Tsakani Maluleke, and Deloitte executives on Wednesday on the utility’s 2023/24 financial year. The audit called into question the utility’s ability to remain a viable entity amid escalating municipal debts and findings of glaring disregard to implementing recommendations made by auditors over the years to address the underlying root causes of its underperformance. Eskom electricity tariffs will increase by 12.7% from 1 April 2025, the National Energy Regulator of South Africa said yesterday.
- Eskom announced this morning that there is a high risk of power cuts over the weekend after significant outages in their power generation capacity over the past seven days. The rand weakened by close to 1% against the dollar on the news of the first load shedding program in ten months, before moderating to be only 0.4% down at the time of writing.
- The Airports Company of South Africa wants the Department of Mineral Resources and Energy to develop and implement a policy regarding strategic jet fuel reserves, especially given reduced local oil refinery capacity. This follows the shutdown of the National Petroleum Refiners of South Africa (Natref), which caught fire on January 4 and is only expected to be operational again on February 20. Natref supplies some 72% of OR Tambo’s jet fuel requirements.
- On Monday, the Trump administration directed local HIV/AIDS organisations it funds to suspend all operations immediately, aligning with Trump’s executive order to pause foreign aid while reviewing its consistency with his foreign policy objectives. The next day, U.S. Secretary of State Marco Rubio issued a waiver, allowing US-funded HIV/AIDS programs to resume operations. The US President’s Emergency Plan for AIDS Relief is the largest foreign donor to South Africa’s HIV/AIDS initiatives, while the US National Institutes of Health is the primary funder of HIV/AIDS research.
- The Analytics Currency Decoder estimates the fair value of the rand at R18.94 against the dollar. After reaching a peak of R19.14 in mid-January, the dollar’s strength has eased, bringing the spot rate down to R18.63. The fair value estimate has been adjusted lower due to the slightly weaker U.S. dollar index. The exchange rate also reflects diminishing positive sentiment following last year’s national election.
- According to the FNB property broker survey, the industrial and retail property markets are experiencing an undersupply, while the office market continues to face an oversupply as companies adopt hybrid working arrangements. The industrial property market remains the strongest, with the retail market closing the gap.
- Shoprite and Woolworths, two of South Africa’s biggest retailers, both reported results on Tuesday that reflected similar sales growth during the second half of 2024 amid continuing low levels of consumer disposable incomes. Shoprite said in an operational update for the six months to 29 December that its merchandise sales increased 9.6%, excluding the furniture business, which is being sold to Pepkor. Meanwhile, Woolworths South Africa saw turnover and concession sales growth of 9.1% for 26 weeks to 29 December 29.
- Glencore’s coal production from South Africa fell by 7% in 2024 due to constrained export rail capacity under Transnet, although it will ramp up output once capacity is restored. Its energy coal production from South Africa last year was 7% lower compared to the previous year. Logistics constraints in South Africa have been forcing some bulk commodity miners to lower production as stockpiles up at mines due to inefficient export rail and port capacity.
- South Africa plans to raise $50 million to help fund a bid to host a Formula 1 race, sports minister Gayton McKenzie said in an interview. He said there have been discussions with the Formula 1 organisers during the week, and that the country will be submitting its bid in May to host the motor racing event in 2027. Talks with potential sponsors, such as Heineken and Red Bull among others, to help raise the capital needed to enter the bid are already underway. Seven-times world champion Lewis Hamilton said last year the time was right for a race in Africa.
- As at the time of writing, the rand was 1.36% weaker and the ALSI was 2% up for the week.
Sources: Dynasty, Business Report, CNN, Bloomberg, Washington Post, BBC, New York Times, Wall Street Journal, Reuters, Economist, News24, Analytics Consulting, Wired, BBC, etc.