Good morning. Following Donald Trump’s fresh China tariff threats on Friday that sent stocks tumbling, there’s been more back-and-forth between the US and China over the weekend. A Truth Social update from Trump on Sunday: “Don’t worry about China, it will all be fine! The U.S.A. wants to help China, not hurt it!!!” Are we headed for another round of Tacos? Email us: unhedged@ft.com.
AI and geopolitics
AI investors have mostly brushed off geopolitical tensions as the trade runs higher on hopes of innovation and future productivity benefits. But the market tide is slowly shifting on this front, particularly with regard to US-China relations. Friday’s sell-off is a key example: Nvidia and AMD fell nearly 5 per cent and 8 per cent, respectively. Other examples from this year include the DeepSeek-fuelled US tech sell-off in January, and when Nvidia shares fell in September after China banned domestic tech companies from buying its chips.
There’s an argument that takes this view one step further — that “predicting breakthroughs” is a fool’s errand, and AI investors would be better off making judgments based on geopolitics and supply chain chokepoints. As Henry Wu from Alpine Macro explains:
At the bleeding edge of innovation, breakthroughs are nearly impossible to predict . . . Value creation will be shaped by where bottlenecks occur and how a G-2 US-China rivalry reshapes global technology flows
Wu says companies at the bottleneck points in the AI supply chain — such as lithography, memory and logic fabrication — will be the near-term winners. These include SK Hynix, Samsung, TSMC, Nvidia, ASML and AMD, whose stocks have already notched, at minimum, double-digit growth year to date; their advantages across the supply chain aren’t a secret to investors. It’s in the long term where the winners and losers could significantly change from what we currently expect, per Wu:
Over time, firms from US-allied countries will be squeezed by Chinese tech advancements and US reshoring . . . Hedge US AI investments with Chinese counterparts to reduce exposure to geopolitical risk
Wu’s point is compelling, but only to an extent. As of now, no single country has a complete AI supply chain, as he shows in the following chart:
As acrimonious as relations are between the “G2” in the AI arms race, it seems unlikely that China or the US can create the entire AI supply chain, or that the entire supply chain can be defined between the US and its allies versus China. The binary view feels misplaced. After all, the US allies identified in the chart are also highly dependent upon business with China.
Wu is wise to point out that China is also investing heavily in AI research and development, for which investors could benefit through exposure. Although there is the question of how much of the AI technology created can, or will be implemented, and by whom.
The broader problem of implementation, even without factoring in geopolitics, might be more important for the future of AI investing. Jim Reid at Deutsche Bank notes that “the US is great at making AI, not using it”. In a recent Microsoft survey the US ranked just 23rd in terms of actual AI adoption, according to Reid:
The US may be the centre of the AI revolution, with 32 of the top 50 AI companies based in California alone, but it is a comparative laggard when it comes to actual users . . . It turns out that applying AI at work is a lot more complicated than initially expected. Generative AI adds a whole new layer of governance issues on top of the challenges of normal technology integration, let alone the problem of how to recruit AI talent and ensure that employees make the most of unfamiliar tools.
(Kim)
The dealmaking rebound that isn’t — yet
This is James Fontanella-Khan, US finance editor at the FT, helping out on Unhedged today.
When Trump won the 2024 US presidential election, dealmakers predicted a revival unlike anything seen in years. The logic was simple: Trump would tear down the regulatory roadblocks that, in their view, had throttled M&A under Joe Biden.
As bankers and corporate lawyers began invoking the “return of animal spirits”, some of us who have watched this cycle for more than a decade were more cautious. Our counter-argument was equally straightforward: dealmaking thrives on stability, and chaos from Trump’s governing style rarely provides it.
So far, the sceptics have been right. Yet many of the bankers and lawyers I speak to insist that the long winter for M&A is ending. There are some signs of life.
A run of megadeals, most notably the $55bn leveraged buyout of Electronic Arts, helped push global M&A activity above $1tn in the third quarter, setting up 2025 to be the busiest 12-month stretch since 2021. Anyone talking to dealmakers can sense the urgency to get transactions done. They hate sitting on the sidelines for too long. And a White House that cheers on dealmaking has lifted spirits.
Falling interest rates, friendlier antitrust regulators, buoyant equity markets and mountains of private-equity dry powder are all helping. So, too, is the rush to build the infrastructure and energy backbone needed for the AI boom.
It all sounds like a turning tide. But I’m still not convinced.
While the value of deals is up 32 per cent on last year, the number of transactions has fallen 8 per cent, according to LSEG. The nearly 38,000 deals announced so far in 2025 are only slightly above the total in 2020, aka the pandemic’s annus horribilis for dealmaking. By contrast, during Biden’s final two years, annual volumes exceeded 46,000.
What’s driving the “boom” isn’t breadth, but size, with 49 megadeals worth north of $10bn, the second-largest count since LSEG began tracking the numbers 30 years ago.
As M&A reporters, we gravitate towards the big, front-page deals. But for the bankers, lawyers and consultants who make their living in the trenches, deal count is a truer barometer of market health. Those numbers are sobering.
Even with macro tailwinds, Trump’s unpredictability is making chief executives hesitate. Boardrooms are paralysed by uncertainty: a president who can change policy with a social post is not conducive to long-term planning.
The backdrop doesn’t help. The US is in trade disputes with China, India, Canada and Europe. The Middle East remains a tinderbox despite a provisional Israel-Hamas truce. Europe’s biggest economies, Germany, France and the UK, are flirting with recession and lurching politically to the far right. And fears that the AI boom could morph into a bubble are no longer theoretical.
The hope for humanity, not just for bankers, is that I’m wrong, the world steadies, and optimism fuels a genuine dealmaking revival. Until then, the sceptics still have the edge.
(Fontanella-Khan)
One good read:
Why everything, everywhere tastes the same
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