CANADA STOCKS-TSX follows Wall Street decline as investors fret over Chinese AI model

Adds context, comments and prices

By Ragini Mathur and Promit Mukherjee

Jan 27 (Reuters) - Canada's main stock index on Monday surrendered some of its stellar 3% gain of this year as investors dumped shares in technology companies on fears that a Chinese artificial intelligence model could shake the valuations of U.S. firms.

The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE lost 0.75% to 25,278.41, after nine successive sessions of gains.

Canada's information technology .SPTTTK sector slumped by 3.57%, dragged by an over 27% drop in electronics firm Celestica CLS.TO and a 14% drop in crypto mining firm Bitfarms Ltd BITF.TO.

The local sell-off closely followed a flight of investors from U.S. technology stocks and a global rout in stocks markets as Chinese startup DeepSeek's low-cost AI model made investors question the sky-high valuations of U.S. A.I.-led companies.

DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple's App Store in the U.S., says it uses lower-cost chips and less data, challenging a bet in markets that AI will drive demand along a supply chain from chipmakers to data centers.

"It's basically caused the market to call into question everything that we thought about AI, like, we need the more powerful chips, we need a lot of energy," said Allan Small, senior investment advisor at Allan Small Financial Group with iA Private Wealth.

Wall Street's tech-heavy Nasdaq .IXIC sank 3.3%. AI darling Nvidia NVDA.O plunged 17%, giving up all its gains since October. .N

However, investors are less worried for Canadian tech companies in the long run.

"The Canadian market is not particularly exposed to that (A.I.) theme," said Étienne Bordeleau-Labrecque, Portfolio Manager at Ninepoint Partners.

"I would expect the TSX to outperform on the downside versus the NASDAQ, because those markets have been driven by that A.I. theme over the last two years," he said.

Before the Monday's fall, the TSX had gained almost 3% so far this month after climbing nearly 18% in 2024, primarily as investors built up their portfolios ahead of an expected change in administration in Canada that is likely to favor business-friendly economic policies.

While a threat of a 25% tariff on Canadian goods is suspended due to the country's economic climate, investors say the impact on the TSX could be lessened if energy, Canada's biggest export commodity to the U.S., is excluded.