As a result, he said funds would be “very benchmark aware” – meaning they would be closely watching the performance of sharemarket benchmarks, which are in turn affected by movements of the largest stocks in the market. McAuley said funds would also be taking measures to limit their exposure if there was a bust.
“They would be hedging their position against this, so that if there is downside they are not completely exposed,” he said.
In contrast, Roger Montgomery, founder and chairman of Montgomery Investment Management, said AI stocks had all the hallmarks of a bubble. These included the hype, high-forward earnings multiples, and “bubble participants buying each other’s products”.
He predicted there would ultimately be a bust because end-users would not spend as much as hoped on AI, causing markets to lower the valuations placed on these stocks.
“I’m not saying it’s imminent,” he said. “I just think booms end, and when they get to a bubble phase, they end disruptively.”
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He said because the AI bonanza was mainly funded with equity, rather than debt, it would be “more like a tech bubble bursting than the GFC”.
For super funds, Montgomery said the impact would depend on how invested the funds were in AI-exposed technology giants, adding there were many high-quality companies outside the “Magnificent Seven” US tech giants – Google-parent Alphabet, Amazon, Apple, Tesla, Facebook-parent Meta Platforms, Microsoft and NVIDIA.
Chief investment officer at MLC, Dan Farmer, said he did not think AI stocks were in bubble territory, and unlike the early 2000s tech bubble, today’s US tech giants had strong earnings growth. He said the technology sector was a big part of the US market, but said super funds would seek to diversify their risk though techniques such as hedging.
“It’s always a balancing act between risk and return,” Farmer said.
About 6.7 per cent of the MLC Super portfolio is invested across AI, including a wide range of US tech companies such as Microsoft, Nvidia, Amazon, Meta and many others.
‘It would have a negative impact as any bubble bursting would, simply because super funds have a high exposure to US equities.’
AMP chief economist Shane Oliver
The debate over whether AI stocks are in bubble territory has gained prominence lately after reports last week that US hedge fund manager Michael Burry had made a $US1.1 billion ($1.6 billion) bet against the share prices of AI giants Nvidia and Palantir. Burry successfully bet against subprime mortgages in the lead-up to the 2008 global financial crisis.
AMP chief economist Shane Oliver, who was “agnostic” over whether AI shares are a bubble, said any bust in US tech stocks would inevitably affect super funds because tech was such an important part of the world’s biggest sharemarket.
“It would have a negative impact, as any bubble bursting would, simply because super funds have a high exposure to US equities, and that’s because US equities are more than half the global benchmark,” he said.
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Oliver said that even if super funds believed assets were at risk of a bubble, trying to time the market was notoriously difficult, and remaining in the safety of cash over the long term would lead to poor returns. “Volatility is the price you pay for gains over the long term,” he said.
Oliver said the “Magnificent Seven” technology stocks had driven about 50 per cent or more of the gains the wider S&P 500 over the last three years, but there were also important differences between now and the dotcom bubble that peaked in 2000.
“Dotcom stocks were not making profits, whereas the Magnificent Seven are making magnificent profits,” Oliver said.
AP
