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.
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)
