It’s all about Artificial Intelligence!!
Further evidence of the snowballing investor interest in Artificial Intelligence came from our recent Raymond James Forum, held on 17th & 18th June, where a series of investor seminars were held. The most popular one appeared to be put on by T. Rowe Price: Generative Artificial Intelligence: The most important innovation since electricity?
As can be seen from the seminar photo below, it was a packed house – standing room only at the back as delegates lapped up the Artificial Intelligence story and it is being utilised by leading global technology companies.
The current Artificial Intelligence mania, has been likened to bubbles, such as the Technology, Media & Telecoms [TMT] bubble in the late 90s and early 2000s. Inherently, the formation of bubbles and associated tops are almost impossible to spot. This is where the famous expression from economist John Maynard Keynes hits the nail on the head – “markets can remain irrational longer than you can remain solvent”. We can always have a view on the market, and in long run it may be the right view – but in the short and even medium term, going with the trend is your better bet.
Anatomy of a bubble: Experiences from 2000
The photo from the forum reminded me of the first days when I joined the company I used to work for in 2000. At the time, a high-flying company called Baltimore Technologies presented in the meeting room and it was equally as packed. The entire research team was there as well as most of the IT team (Baltimore Technologies was an e-security firm) to ask the tough questions.
What made the environment different at that time was the engagement from the general public. Forum websites were ablaze with rumours and tech share tips, and tabloid tip-sheet columnists were revered. Buying a utility or a bank share practically did not happen – new account teams at brokerages were flat out trying to cope with the demand to open new share-trading accounts and these were mostly first-time, novice investors swept up by how well the tech companies had done. Companies were changing their names to add ‘.com’ at the end and you were literally seeing their share prices double and triple the next week, even though they had not told investors or any actual corporate plans.
The irrational exuberance of the ’TMT’ bubble also extended to other areas of the market such as Telecoms and even Biotech companies as the bubble swept across many international markets. It was common to see mandatory weightings placed on Fund Managers to hold a minimum level of technology stocks.
Anatomy of a bubble: Experiences from 2008
The journey of the lead up to the Great Financial Crisis of 2008/2009 was also a time where it was generally realised that in particular housing markets were overheated, but only a rare few predicted a financial crisis to such an extent and an even rarer few were actually able to make money from it.
The signs of a bubble were less outwardly obvious at the time, partly due to the ways in which it manifested itself. As property prices (across the West, but especially in the US) began to rise in earnest, so did issuance of sub-prime mortgages – so called because they were obtained by homebuyers who weren’t approved for traditional loans largely due to weak credit histories. Some credit companies offered NINJA mortgages – no income, no job, no assets. Banks then packaged prime and subprime mortgages together and sold them on to professional investors as AAA rated.
This abundance of credit from banks continued to fuel property markets in the West, which many saw as a one-way bet. This also coincided with an extra-ordinary build-out of housing and infrastructure in China.
In hindsight, warnings signs to me were:
- As house prices rose, a steady stream of people giving up their steady jobs to become first-time property flippers – they could always be flipped on at a higher price (remember the number of property programs on TV prior to the crisis?!)
- The abundance of bank loans and credit meant that it was possible for people to easily live above their means – taking two overseas holidays instead of one domestic holiday or spending an unusually large sum of money on property renovations
- Unheard of Icelandic banks offering unusually high retail deposit rates to UK investors (because they were unable to fund themselves)
- Pervasive bull market in listed property companies on the UK stock market
Whilst the signs were certainly not as obvious as in the 2000 stock market boom, there was still plenty of evidence of speculation – this time, involving property and the ease with which mortgages and bank loans could be obtained. What made the Financial Crisis particularly significant was the involvement of banks at its core – which threatened to wipe out deposit holders and bring industry at large to a complete halt.
Anatomy of a bubble: Gold
As an aside the gold price was also booming at the time and was relatively unaffected by the Financial Crisis – I remember Harrods started selling gold bars in 2009 to the general public and gold vending machines could be found in Europe. The gold price reached its peak in 2011 which has only very recently been surpassed!
What are Raymond James, Richmond’s views on the current AI frenzy?
Going back to the Raymond James Forum and the presentation on AI, the presentation pack included a page showing the overall ecosystem of AI companies, found mainly in the US. The list of companies was surprisingly small. The research and development involved in building AI models means it can only be done by a few specialist firms who have access to sufficient quantities of extra-ordinarily well-paid programmers and access to sufficient quantities of highly complex semiconductors.
In short, it is not an easy world for a new entrant to break into. Those companies operating within the AI ecosystem are generally profitable and in many cases, very profitable with strong balance sheets. If they fell particularly out of favour, then we could see the bursting of a minor bubble, somewhat akin in smaller way to the 2000 Tech Boom, but our view is that there are relatively few signs of pervasive excess.
Additionally, as in 2000, where the majority of stock market companies were never part of the Tech Boom, so too, we see an abundance of opportunities outside of AI. The transition to net zero, the re-shoring of manufacturing and the emerging theme of national resilience are areas providing as equally interesting investment opportunities.
As ever, please do call 020 4502 4731 or email tom.moloney@raymondjames.com to talk about our common sense approach to investing!
Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.