Preview
In focus: DeepSeek, hyperscalers and capturing AI-driven growth in 2025
The emergence of DeepSeek may yield both challenges and opportunities for the artificial intelligence (AI) ecosystem over the long term. While the disruption DeepSeek caused in January has cast doubts over the investment cases of AI-related companies as investors question the high cost and infrastructure needs of AI development, we think sudden investment decisions—particularly pertaining to semiconductors—may be premature at this point.
In the meantime, we will continue to explore the current and new growth synergies across the AI value chain. From hyperscalers to companies further afield, these potential “next winners” may be the key to unlock better return on investment (ROI) from the AI theme.
Investment outlook
In North America, inflation and interest rates, along with the implementation of new policies by US President Donald Trump, will likely dictate market direction in the first half of 2025. Trump recently announced a 25% tariff on Canada and Mexico, only to pause it following negotiations on border and drug control measures. A separate 10% levy on China remained in place.
In Asia, the risks of US tariffs triggering a trade war are dominating investor sentiment in Asia. The rapidly-evolving situation, with Trump first hiking and then pausing tariffs almost overnight, has caused volatility in Asian markets, and we expect the volatility to persist until US policies become more clear and lasting.
In Europe, we have good reason overall to believe that fundamentals should play a more significant role in driving stocks in 2025 than they did in 2024, where national elections and the Magnificent Seven stocks dominated the financial news flow. Nonetheless, a combination of inflation data and interest-rate expectations will likely continue to be significant in shaping the market direction in Europe in the first half of 2025, along with the impact of the policies that the Trump administration will enact, especially if tariffs affect European trade.
Market review: January 2025
In January, global equities delivered a positive return in US-dollar terms, as 10 out of the 11 global equity sectors advanced. As measured by MSCI indexes in US-dollar terms, developed market equities outperformed emerging market and frontier market equities, while global value stocks substantially outperformed global growth stocks.
Global equities started 2025 on a strong note, as they collectively advanced in January amid a generally solid economic backdrop. However, investors expressed concerns about Trump’s tariff plans and a potential global trade war, as well as the emergence of a Chinese startup company’s new AI model. On the economic front, global manufacturing activity expanded in January for the first time in seven months, and flash reports for the same month showed that global services activity continued to grow in many regions.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.
Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Diversification does not guarantee a profit or protect against a loss.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.