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By Lucy Raitano
LONDON (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, 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, and sector peers ASMI and BE Semi all fell 7%-12% on Jan. 27, before recouping losses later in the week, as did Siemens Energy, 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.