DeepSeek: Why REITs And Utilities Loved The News

Market Response to AI Developments - The introduction of China's AI, DeepSeek, has led to a significant market reaction, particularly affecting AI stocks negatively while boosting sectors like REITs and utilities [1][2][4] - Major AI companies experienced substantial declines, with NVIDIA (NVDA) down 15.06%, Microsoft (MSFT) down 1.87%, and others following suit [3] Performance of REITs and Utilities - REITs, as indicated by the Vanguard REIT ETF (VNQ), saw an increase of 1.27%, while regulated electric utilities also performed well on the same day [5] - The performance of these sectors is attributed to their predictable cash flows and the relative safety they offer compared to the uncertainty surrounding AI investments [10][17] Known vs. Unknown Investment Dynamics - The market's shift towards REITs and utilities reflects a preference for known, stable returns (8%-10% expected returns) over the unpredictable nature of AI investments [9][10] - The allure of AI's potential returns diminished as new competitors like DeepSeek emerged, leading investors to reassess the attractiveness of more stable sectors [10][17] Bifurcation in the Utility Sector - The utility sector showed a stark performance difference, with regulated utilities performing well while independent power producers (IPPs) faced declines due to their uncertain earnings outlook [12][13] - Regulated utilities maintain predictable earnings growth, making them more appealing in light of the recent AI developments [13] REITs' Relationship with AI Stocks - REITs typically have an inverse relationship with AI stocks; when AI stocks rise, REITs tend to fall, and vice versa [16] - The DeepSeek news did not fundamentally impact REITs, as their earnings remain stable regardless of AI developments [16][17] Historical Context and Future Outlook - The analysis suggests that if AI excitement wanes, sectors like REITs and utilities may experience substantial outperformance, similar to trends observed after the tech bubble burst in 2000 [18]