The AI Revolution: What could it mean for your investments?

DeepSeek, Nvidia, ChatGPT, Claude, Gemini... there are a lot of buzzwords doing the rounds right now. And while everyone’s interested (and trying out AI for everything from work emails to dinner recipes), no one’s sure what the AI revolution will mean in the markets over the long-term, and therefore, how it might affect your money. Here’s a hot take from 10X. 

Ok, so let’s start with the basics. AI models need a lot of computing power at scale. Until recently, the producer of computer chips (and therefore, the necessary computing power) that looked best positioned to take advantage of this need, was chipmaker Nvidia. Nvidia's position in the AI market was thought to be secure. They had created a hardware moat that could not easily be challenged. Furthermore, Nvidia had proprietary software was also thought to be difficult to copy. 

And then along came DeepSeek. 

DeepSeek is a Chinese AI startup with a surprisingly efficient AI model. Their recent launch caused a significant market reaction, wiping out a substantial amount of Nvidia's market capitalisation. Developed by a relatively unknown AI lab in China (which itself was spun out of a quantitative hedge fund), it gained attention for its ability to achieve similar results to other models using a fraction of the computing power (and therefore cost). This efficiency is attributed to better software, rather than simply making use of more powerful hardware.  

As mentioned, Nvidia’s position in the market was thought to be very difficult to challenge. But, DeepSeek’s efficiency and reported bypassing of Nvidia software has many questioning the strength of Nvidia's position. Which in turn leads to questions about the high profit margins Nvidia currently enjoys. 

Have we seen it before with Cisco? 

There could well be parallels between Nvidia's current situation and Cisco's position during the dot-com boom of the 90s. Cisco provided the infrastructure for the rapid evolution of the internet in the late 90s. As the internet became more accessible and competition intensified, Cisco's margins declined, and its stock price never recovered to the peak levels of that time. History is often a warning: being the initial provider of the rails doesn’t guarantee long-term dominance as the market evolves. 

 Equity markets and AI euphoria 

The strong recent performance of the US equity market, and particularly the S&P 500, has been heavily concentrated in the so-called ‘Magnificent Seven’ tech stocks (they who’ve also been the main beneficiaries of the AI revolution). The market has predicted significant growth for these companies due to their rate of innovation, but it hasn’t factored in the possibility of disruption to these incumbents by new innovations, such as DeepSeek. The risk is that current valuations (and therefore stock prices) are based on expectations of continuous growth for these large tech companies, leaving the market vulnerable to a correction if those expectations aren’t met.  

What are the implications for investors?  

If the tech sector does undergo serious disruption, the equity markets could see lower than expected returns (so if you are heavily invested there, you might not come out as well as you thought you would).   Currently, the market isn't pricing in better AI efficiency, which could mean that some of the current tech giants may be challenged by smaller companies or other giants in adjacent spaces. Apple, for example, may benefit from the commoditization of AI by being able to select the best models without having to build its own from scratch.  

Did you know you can speak to a 10X investment consultant about your investments free of charge? There are no call centres at 10X, just experienced humans wanting to help. 

Will we get a reality check on AI?  

There is a lot of potential for market disruption within the AI sector, which suggests that current assumptions about the long-term dominance of the incumbents may be flawed. The market could be ignoring history by assuming that early innovators will continue to capture the most value. Investors should be cautious, and consider the downside of what could well prove to be an overly optimistic market. And that begs the question: are we in fact looking at a bubble?   

What is 10X’s strategy in the face of a potential tech bubble?   

First, let’s consider some of the main factors influencing investment performance in 2024. It was a year of global elections and uncertainty, but despite that, most equities performed strongly.   

• From a global equities standpoint, the MSCI World index delivered around 23% returns in Rands, driven by the US market 
• South African equities delivered around 13% returns, outperforming many emerging market peers 
• Inflation in 2024 was just under 3%, resulting in strong real returns for investors 
• South African bonds outperformed South African equities, which is unusual, producing around 11.5% at the start of the year with additional capital gains of about 6% as yields fell throughout the year 
• The US election in the fourth quarter led to a stronger dollar, which created a headwind for non-US assets 
• As mentioned above, US equity returns were concentrated in a few mega-cap tech shares, which returned around 67% in dollars 

Looking at the performance of global equities, and the mega-cap tech stocks in particular, it might be tempting to argue for investing heavily in that direction. However...   

We pride ourselves on employing a long-term, risk-adjusted approach to protect investors from the dangers of potential market bubbles. Recognising that short-term market timing is exceptionally difficult and often detrimental, we focus on building portfolios that are robust over a five to ten-year time horizon.   

Instead of chasing the best performing assets of the previous year, we try to position portfolios to deliver strong real returns, with an increased probability of meeting retirement goals. Diversification is key here: for example, we are currently less heavily invested in developed market equities due to concerns about inflated US valuations (and potential tech bubbles). We are also more heavily invested in South African inflation-linked bonds, an asset class currently offering equity-like returns with lower risk.   

How else does 10X navigate the inherent uncertainty of investing to meet retirement goals over the long term?  

In short, we don’t buy into the hype.   

Put another way, we use data to plan for the long-term.

We’re interested in helping you achieve your retirement goals, not on FOMO and potential tech bubbles. To explain further...   

(Sorry, this is going to get a bit technical, but best you know how we think if we’re going to claim to be a good custodian of your nest egg!)  

• We apply the principle of diversification (spreading the risk of underperformance in any particular asset class) to the construction of portfolios, using strategies such as capping to avoid overconcentration in particular shares or groups of shares, as seen with the 'Magnificent Seven' tech stocks 
• We set realistic, forward-looking return expectations by relying on robust valuation metrics such as the cyclically adjusted price-to-earnings ratio (CAPE). We use this to assess whether any markets are overvalued (like, we would argue, the current US market) as these markets typically have much lower returns over the next decade.  
• We rely on hard numbers and objective data to avoid chasing media narratives (there’s a lot of hype out there) 
• We use scenario planning to ensure portfolios can weather various best- to worst-case economic and political situations 

By combining diversification, valuation awareness, scenario planning, and a focus on long-term real returns, 10X aims to protect investors from the downside of market bubbles and market hype. For investors such as yourself, the key is (and has always been) not to panic in times of market volatility and stick to long term investment plans, as switching based on short term performance can often destroy the value of your investments. 

Check out our funds page for more on how we invest.