AI – Race to the Bottom
The recent reaction of investors to the threat that AI poses for the software sector has been extreme with Microsoft, the second largest constituent of the MSCI AC World Index, declining some 20% year to date. Microsoft is not alone. The leading companies in the Indian software sector have also had a tough run with sector leaders, Infosys and Tata Consultancy, suffering similar declines. Will AI decimate the software industry or is that simply the wrong question?
It is not just the software sector under threat - accountants, lawyers, banks, insurance companies and passive index trackers are among a host of industries that will face severe competition from AI driven models.
The sums being spent on data centres by the likes of Nvidia and others are simply mindboggling. We understand that the Asian tech trio (TSMC, Samsung Electronics and SK Hynix) are fully booked through to the end of 2027 with pricing power remaining in the hands of the vendors. The CAPEX plans of these three companies continue to rise but the shorter-term consequences on traditional DRAM buyers are severe. Portfolio holding Lenovo – the largest global manufacturer of personal computers – is a case in point.
We were very interested in a recent research report by Jefferies’ Edison Lee. He notes that Chinese AI developers continue to close the performance gap with the US AI developers. One year ago, the best Chinese offering was approximately 60% as good as the best US model, today the best Chinese offering (GLM5) is already 94% as good as the best US model (Claude 4.6 Opus). It appears that the open source AI models favoured by China are making progress and – without doubt – are being developed at a fraction of the cost.
While coal is still the most significant source of energy for China, the rapid roll out of renewables, coupled with huge investment in the national grid and the simultaneous roll out of energy storage systems, hands China a huge cost advantage over other countries. Data centres will be largely powered by renewables.
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