The rapid surge of capital flowing into the artificial intelligence (AI) sector is evoking concerns among industry experts, who draw striking parallels to the dot-com era. James Penny, the Chief Investment Officer of TAM Asset Management and an experienced environmental, social, and governance (ESG) investor, notes that the present market sentiment bears resemblance to the early days of the tech bubble that burst in 2000, resulting in substantial losses on the Nasdaq index. Companies merely mentioning AI in their earnings reports are witnessing significant boosts in their stock prices, reminiscent of the dot-com era hype.
The recent AI frenzy gained even more momentum after Nvidia Corp., a leading AI chip manufacturer, surpassed market expectations with its impressive sales targets. Since the announcement, Nvidia’s market value has surged by nearly 30%, contributing to a more than 160% gain for the year and significantly boosting the overall value of the Nasdaq index. This trend has particularly benefited ESG funds, which increasingly rely on technology to reduce carbon footprints while maintaining growth. Bloomberg Intelligence analysis reveals that technology stocks make up around one-third of preferred holdings in Article 9 funds, the highest ESG classification in the European Union. Consequently, ESG-registered funds hold over $20 billion in Nvidia alone, with some fund managers specifically marketing themselves as AI-themed, collectively managing approximately $8 billion in assets.
While Nvidia primarily supplies the AI processing chips, the actual development of AI technology involves various tech giants such as Microsoft Corp., Amazon.com Inc., and Google parent company Alphabet Inc. The generative AI market, which includes tools capable of creating content from prompts, such as text or images, is projected to experience annual growth rates of over 40% and reach a market size of $1.3 trillion within the next decade, as indicated by Mandeep Singh, a senior analyst at Bloomberg Intelligence.
Penny, drawing on his decade-long experience in selecting assets based on their ability to outperform in an environment shaped by environmental and social risks, believes that the current enthusiasm for AI is partly fueled by premature bets that the Federal Reserve will reverse its cycle of interest rate increases. The perception of a regional banking crisis has led to speculation that rate cuts will be implemented soon, driving further inflow into growth investing. In this context, the sudden emergence of the AI trend has amplified market exuberance.
However, Penny warns that this buying frenzy is primarily concentrated in a few sectors and a handful of stocks, leaving the market vulnerable to a potential recession. To mitigate risks, he proposes adopting a strategy akin to the gold rush era, where smart investors focused on investing in tools required to extract gold rather than searching for gold itself. Instead of following the crowd in investing solely in AI manufacturers, Penny suggests a more selective approach, concentrating on AI adopters. This “pick-and-shovel” strategy seeks opportunities among companies that support and facilitate the AI theme and movement.
Bloomberg Intelligence’s analysis highlights memory chips, essential for deep learning applications supporting generative AI, as one such area with potential. It identifies Samsung Electronics Co., SK Hynix Inc., and Micron Technology Inc. as key players in this field. Additionally, semiconductor testing device manufacturers like Teradyne Inc. from the United States and Advantest Corp. from Japan are also expected to benefit from the prevailing AI excitement.
Given the current market environment, Penny advises caution in overexposing portfolios to sectors heavily reliant on low interest rates and a robust economy. Recognizing that recessions often disrupt the status quo, he stresses the importance of being mindful of potential risks and challenges associated with high-growth narratives.
