Viraj “Raj” Patel, Head of Asset Allocation at Fiduciary Trust International, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): Could DeepSeek’s rise signal increased global competition for Nvidia? And how should investors react?
VP: We think that the announcement at DeepSeek over the weekend was certainly a wake up or an aha moment for AI. I think for a while a lot of investors were thinking that the US is the only game for AI. And this was obviously not just a breakthrough, but I think DeepSeek also told us that they can build AI models that could compete with the US at a much lower cost. So I think what spooked markets yesterday was not necessarily the development of an AI model by DeepSeek. I think the idea was always that while the U.S. had a lead, it was foolish to think that they would be the only game in town. I think the massive step function down in cost so soon spooked AI investors versus what you would expect on a technology to have more of a smoother glide path at early stages of implementation. So I think for the hyperscalers and AI companies that are spending hundreds of billions of dollars, I think this is maybe a little bit of a wake up call in terms of this is productive capital and productive investment behind a technology that is largely going to be transformative. But the new question in markets after DeepSeek’s announcement on what they’ve been able to accomplish at the cost they’ve been able to do that is is the return on investment that a lot of these Mag 7 hyperscalers and AI companies are throwing behind in CapEx and investment going to yield a sufficient return on investment? Our answer is yes. We wouldn’t extrapolate one day of market activity into a long-term thesis or just one announcement over the weekend on an AI competitor, but we think that this is a real technology that should have productive benefits to society in the intermediate to long term. But in the short-term here, lots to unpack in terms of investment, what the existing assumptions were regarding what it takes to build and train AI models may have been upended a little bit, but again, we are acutely focused on earnings this week where a lot of AI or hyperscalers are reporting earnings in the technology and Mag 7 space and it’ll be interesting to see what they have to say.
AM: And Nvidia (NVDA) has said that DeepSeek-R1 actually is good, that it will mean that eventually they’ll have to buy more Nvidia chips. And the assumption is that Nvidia chips maybe are even being used secretly in this R1. Do you believe Nvidia when they say that?
VP: Lots to unpack. As I said, I think early indications from AI experts are questioning whether the technology they have built at the cost they built it at could be built with Nvidia’s newest hardware, which is leading others to believe that okay, they might have built this technology or this AI model with older Nvidia chips, which you can use then to circumvent some of the export controls on chips that the US has in place. But again, I think a lot more is to be learned in the coming days and weeks in terms of just how they built this on the timescale they have, the cost they have and on the hardware they have. So if they build something circumventing some of the export controls on chips, they’re probably not likely to be transparent about it. But as more details come out and just how efficient and comparable these AI models are, or language learning models to some of the US counterparts which are using best-in-class chips and hardware will come to light over the coming days and weeks and see if they can really kind of compete on an apples to apples basis.
AM: The DeepSeek news was a shock to investors. Are there sectors or opportunities you see elsewhere in the market where they should consider investing?
VP: Yeah, we think if you think about the Mag 7 AI or technology trade, which has done really well and as you mentioned earlier, looking for places to rotate in the markets, i.e. areas that have done really well, Mag 7 and technology, and now we are facing four years of a new administration under President Trump. They are natural beneficiaries in other sectors like financials for example. We have a regime in place that is pro-business, pro-markets, wants decreased regulations. We should see increased activity in capital markets, increased activity by the investment banks, likely more IPO activity. These are natural secular tailwinds for financials. We think given the deregulation mantra that President Trump and his administration is talking about, we think there’s opportunities in cyclical areas like energy materials, industrials, especially if he’s thinking seriously about implementing some of his protectionist policies about making more at home, manufacturing at home and really boosting manufacturing inside of the us. Those areas should be natural beneficiaries as well.