Analysis: Europe's AI bulls pin hopes on 'Jevons Paradox' after DeepSeek rout

Lexicon Pharmaceuticals

04/02/2025 05:30

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      DeepSeek AI selloff sparks debate in Europe
    

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      'Jevons Paradox' suggests demand could increase as prices
fall 
    

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      Tech stocks rebound, but energy needs for AI revolution in
focus
    

  
    By Lucy Raitano
       LONDON, Feb 4 (Reuters) - Artificial intelligence bulls
in Europe are dusting off a 160-year-old economic theory to
explain why the boom in the sector's stocks may have further to
run, despite the emergence of China's cheap AI model DeepSeek. 
    Tech stocks worldwide plunged on Jan. 27 after the launch of
DeepSeek - apparently costing a fraction of rival AI models and
requiring less sophisticated chips - raised questions over the
West's huge investments in chipmakers and data centres. 
    At the heart of the selloff was U.S. advanced chipmaker and
AI poster-child Nvidia  NVDA.O , which lost 17% of its value, or
close to $600 billion, in the largest one-day drop in market
capitalisation for any company on record.
    Since then, tech stocks have rebounded, with European
markets hitting new highs, and a 19th century economic theory is
suddenly on everyone's lips: the Jevons Paradox. 
    Named after English economist William Stanley Jevons, it
posits that when a resource becomes more efficient to use,  
demand can increase - rather than decrease - as the price to use
the resource drops.
    "I hadn’t discussed it until Monday (last week), and then
suddenly it’s everywhere," said Helen Jewell, Chief Investment
Officer at BlackRock Fundamental Equities, EMEA. 
    "This paradox highlights one of the uncertainties at the
moment," said Jewell, flagging that a key question for European
stock-pickers is whether data centres and their suppliers will
be less in demand.
    "One of the big question marks from (last) Monday’s news is
how much energy is going to be needed for the AI revolution?" 
    The selloff hit direct and indirect AI plays alike. Dutch
semiconductor equipment maker ASML  ASML.AS , and sector peers
ASMI  ASMI.AS  and BE Semi  BESI.AS  all fell 7%-12% on Jan. 27,
before recouping losses later in the week, as did Siemens Energy
 ENR1n.DE , which provides hardware for AI infrastructure.
    "Jevons Paradox strikes again!" Microsoft chief executive
Satya Nadella said in a post on X.
    "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."

    THE NEW BUZZWORD
    On Friday, Tomasz Godziek, portfolio manager of the Tech
Disruptors fund at J. Safra Sarasin Sustainable Asset
Management, said lower AI costs could exemplify the Jevons
Paradox. 
    "Ultimately, this could fuel a new wave of AI investment,
creating fresh opportunities, particularly in software and
inference technologies," Godziek said. 
    Portfolio managers at Thematics Asset Management, an
affiliate of Natixis IM, cited Jevons Paradox as one reason they
believe demand for AI chips may remain healthy.
    Mark Hawtin, head of the Liontrust global equities team,
also said his investment thesis on AI was reinforced by the news
on Jan. 27, flagging the paradox.
    "Everyone has become an expert on Jevons Paradox," said
Aviva Investors portfolio manager Kunal Kothari, who manages a
UK equity income fund with around 2 billion pounds ($2.5
billion) in assets.
    "The falling cost of improved productivity through GenAI
will likely benefit companies in the UK market generally, as
they will predominantly be consumers of these technologies," he
added, pointing to data and software names like RELX  REL.L ,
LSEG  LSEG.L , Experian  EXPN.L  and Sage as likely
beneficiaries.
    
    DATA CENTRE NEEDS IN FOCUS    
    The need for data centres and the vast amounts of power
required to run them has driven a lot of AI investing in Europe
already, given that there aren't any homegrown rivals to the
likes of Nvidia, whose shares have rocketed by about 200% in
under two years.
    "There is an implicit assumption that the adoption and usage
of AI would require increasingly more chips, and more data
centre capacity and power consumption," said Kasper Elmgreen,
CIO of fixed income and equities at Nordea Asset Management.
    "What DeepSeek has done is to question what is required from
that route and what can be delivered by making much better
software."
    Not everyone is convinced of the new rationale, including
Jordan Rochester, head of FICC strategy at Mizuho EMEA. 
    "Whilst many Nvidia optimists pointed to Jevons Paradox to
help them sleep better at night ... it was less convincing in
the short term after what has been a meteoric rise in Nvidia
shares," he wrote in a note.
    ($1 = 0.8122 pounds)

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FOCUS-DeepSeek gives Europe's tech firms a chance to catch up in
global AI race     urn:newsml:reuters.com:*:nL3N3OQ1I2
Big Tech faces heat as China's DeepSeek sows doubts on
billion-dollar spending     urn:newsml:reuters.com:*:nL6N3OP0E2
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 (Reporting by Lucy Raitano. Editing by Amanda Cooper and Mark
Potter)
 ((Lucy.Raitano@thomsonreuters.com;))