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How to beat the AI meltdown: As panic over Chinese rival sees US tech shares crash we reveal if YOUR pension is underneath menace

Don’t panic, but your pension and other investments are likely to have had a difficult start to the week.

At worst they have fallen in value, and at best they are having a bumpy few days. And there’s likely to be a turbulent road ahead.

The mayhem is coming from an unlikely source – a Chinese technology start-up that, until this week, few people had even heard of.

You may wonder what on earth this company, called DeepSeek, has to do with you and your pension. 

After all, there is no chance that you are invested in it, because it does not have any shares available to buy on a public stock market.

Also, it is small and has little track record – it has just 200 employees and was founded just a few years ago in a small lab in eastern China. 

Scare: Tech Chinese technology start-up DeepSeek's new AI chatbot has sent shockwaves through stock markets worldwide

Scare: Tech Chinese technology start-up DeepSeek’s new AI chatbot has sent shockwaves through stock markets worldwide

Hardly the type of company that you would expect to send shockwaves through stock markets worldwide – or play havoc with your pension.

But, although it may be small and relatively unknown, it could be set to disrupt what may be the biggest investment theme of our time: AI. And that is what has got investors ruffled.

That is because DeepSeek has created an artificial intelligence tool – or chatbot – that some experts believe could rival more established AI companies that have had billions of pounds invested in them.

It can answer users’ questions or perform tasks such as mathematic calculations or coding using the information it has been trained on and its own powers of reasoning.

DeepSeek possesses three key properties that caught investors by surprise.

Firstly, its immediate popularity. It rose rapidly from relative obscurity and by Monday it was so popular that its chatbot tool became the most downloaded free app by Apple users in the UK and US.

Secondly, it’s cheap to run. Chatbots and AI tools need to be trained by reading huge volumes of information, which requires computing power in the form of chips.

DeepSeek claims that to get its chatbot up to its current standard required just £5 million of computing power – a fraction of its more-established rival ChatGPT.

Thirdly, it’s quite good. It has alarmed investors that an upstart could appear as if from nowhere and rival the established players.

Yes, there are doubts about its quality, whether users’ data is safe and will be kept private – and whether multinational companies will ever really trust this tool from a start-up in communist China. But, in a sense, whether DeepSeek itself triumphs in the global AI race is not the point.

Its existence raises fears not only that DeepSeek will challenge the dominance of the established rivals, but also that other companies could as well. The barrier to entering the global race appears far lower than it did even a week ago.

Why is this disrupting financial markets?

AI is the big investing theme that is dominating these markets worldwide.

The biggest companies around the globe are those that are investing heavily in its future: chipmaker Nvidia, as well as tech firms Apple, Microsoft, Amazon, Google parent company Alphabet, Facebook owner Meta, and Elon Musk’s Tesla. Such is their dominance that they are often referred to as the Magnificent Seven.

These companies are so valuable – largely because they’ve been leading the AI race – that they are worth a fifth of the total value of all the firms listed on all the stock markets around the world.

Now let’s look at what happens when you throw upstart DeepSeek into the mix. The firm that has been hardest hit is chipmaker Nvidia.

At its peak last year it was worth more than $3 trillion dollars and, until this week, it was the biggest company in the world.

Its value was based on the assumption that AI will need large volumes of advanced, expensive chips to fuel it. 

But DeepSeek’s chatbot was created with just a fraction of the chips of its rivals, and Nvidia’s share price plunged as a result. It is down more than 13 per cent in the past five days and lost $589 billion in value on Monday alone.

David Coombs, head of multi-asset investment at Rathbones Asset Management, says: ‘It is a bit like if you’re building a house and you think you’ll need 1,000 bricks but now you find you actually only need 100.

‘All of a sudden it looks like we may not need as many chips to produce this technology. In a sense it democratises AI.’

Victim: Chipmaker Nvidia, which soared in value last year, is down over 18% in the last five days and lost $589bn in value on Monday alone.

Victim: Chipmaker Nvidia, which soared in value last year, is down over 18% in the last five days and lost $589bn in value on Monday alone.

Other chipmakers also suffered, including ASML and Broadcom.

Meanwhile, companies such as Alphabet and Microsoft dropped in value initially, because it looked as if DeepSeek could challenge their dominance. 

As Jason Hollands, a director of investing platform Bestinvest, puts it: ‘Markets have begun to cast doubt on the assumed dominance of US tech firms in the AI space and the lofty valuations they have commanded.’

But when investors realised that the success shown by DeepSeek meant that these companies, too, may not need to buy as many expensive chips to build their AI technology, their values recovered.

Financial markets have settled down after Monday’s dramatic swings. But this is unlikely to be the end of the turbulence. DeepSeek was a valuable reminder that there will be plenty more disruptive twists and turns in the AI story.

After all, although we are assured that AI will transform everything from the way we work and travel to the way we communicate and live day-to-day, no one knows precisely which companies will lead the way and what the technology will look like in a few year’s time.

So what does this mean for your pension?

It is almost certain that your pension and other investments include AI and other technology companies. Their sheer size means they are practically inescapable.

The Magnificent Seven tech firms alone make up a fifth of the value of all the companies listed on stock exchanges around the world. They also make up a third of the US stock market index as measured by the S&P 500.

So, if you hold a global, US or technology fund in your portfolio, you will have significant holdings in these companies and will have been affected by the turbulence of the past few days.

If you invest in a passive global or US fund, you are even more likely to have a large holding in them. 

That is because such funds simply track the value of an index such as the MSCI World index of the largest companies around the world, or the S&P 500 index of the biggest US companies. They have no power to pick and choose companies, unlike an active fund run by a fund manager.

If your money is in a default pension fund, which was chosen by your workplace pension provider, you are likely to hold these stocks. 

This is especially the case if you are some years away from retirement, as such funds tend to invest more in shares, and move into bonds – which are seen as safer – as you get older.

In general, holding the Magnificent Seven is a good thing. Much of the growth of global stock markets over the past few years has come from these companies. 

But it does mean that you need to watch out as a slump in value from just one company can affect the size of your pension or investment portfolio.

As Damien Fahy, founder of personal finance website Money To The Masses, explains: ‘This concentration means that any significant downturn in the tech sector can have an outsized impact on the broader market. This concentration risk is one of the drawbacks of investing in passive trackers in particular.’

So what should you do?

First of all, don’t panic. Any changes to your portfolio should be done thoughtfully, carefully and not as instantaneous reaction to market news. After all, you’re investing for years and decades, not to make a quick profit.

However, you may want to check just how much of your investments is made up of this small handful of technology stocks to ensure that it is a level you are comfortable with.

Laith Khalaf, head of investment analysis at investment platform AJ Bell, says: ‘The current sell-off provides a timely nudge for investors to check in on their overall exposure to the US stock market, and in particular to the technology sector.

‘The strong performance of the US tech titans has resulted in their stature within US and global funds growing, and also means those funds now probably make up a bigger share of investors’ portfolios to boot.’ 

He adds that investors may find they hold more in these stocks than they ever intended as a result.

However, if you do trim your holdings of the Magnificent Seven, you need to be aware that if the technology sector continues to perform strongly, your portfolio may be left behind. 

You will have to be content that there is a chance you are prioritising lower returns for the sake of lower risk due to exposure to such a small number of companies.

Breakthrough: DeepSeek claims that to get its chatbot up to its current standard required just £5m of computing power – a fraction of its more-established rival ChatGPT

Breakthrough: DeepSeek claims that to get its chatbot up to its current standard required just £5m of computing power – a fraction of its more-established rival ChatGPT 

Where are there opportunities?

If you want to reduce your investments in the Magnificent Seven, you could consider moving some of your money into what is called an ‘equal weighted’ fund, says Holly Mackay, chief executive of investment website Boring Money.

Most passive funds that invest in an index aim to replicate it perfectly, so the biggest companies make up the largest proportion of the fund, while the smallest make up the least.

But in equal weighted funds, each component is the same size.

‘So, for example, with an Equal Weighted S&P 500 fund, you own all 500 of the US’s largest companies in equal proportion, regardless of their size,’ says Mackay. 

‘So you’d have as much in Salesforce, Visa and Walmart, for example, as you would in Nvidia or Apple. This helps to spread your money around and avoid the over-concentration to a powerful few.’

If, conversely, you look at your portfolio and think you do not have enough exposure to these companies, now might be a time to increase your holdings – if you have a strong appetite for risk.

David Coombs, at Rathbones, says that the fund he manages bought some of the chip makers yesterday, including Nvidia and ASML, because prices had fallen and they had trimmed back their holdings in recent months.

He is also on the lookout for the companies set to thrive thanks to the opportunities afforded by AI.

‘AI can transform companies,’ he says. ‘So if DeepSeek means that it gets cheaper then companies that are using it could benefit.’

Such companies can be found in the most unlikely of places, he says. For example, Rentokil is using AI and camera technology to transform its pest control practices.

Alternatively, you may want to consider a fund that seeks out new opportunities in AI

and technology. For example, the Baillie Gifford American fund has Amazon, Meta, Nvidia and Tesla among its top-ten holdings, but it also has large holdings in other companies that are likely to benefit from AI.

‘In our American Fund, we have been trimming our holding in Nvidia throughout 2024 and recycling this capital in other stocks further up the AI value chain,’ says James Budden, head of global marketing at Baillie Gifford. 

‘These include Cloudflare, Shopify and Duolingo which are continuing to innovate in AI business optimisation, driving business improvements.’

It has turned a £100 investment into £139 over the past year.

rachel.rickard@dailymail.co.uk

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