Hamartia Antidote
Elite Member
There are grave fears about an AI bubble that could implode and take the global economy with it. In China, it may have already begun.
There’s a lot of chatter about AI at the moment as the world mulls over the risks it poses to humanity, whether it will steal our jobs and whether we’re willing to put up with giant data centres in our backyard.
There’s also a fear that the financial gamble of overhauling the world with AI will not pay off as giant companies and investors pile ever more money into the technology, only for the sector to become an overinflated mess like the Dot-com stock market crash in the late 1990s.
Well, that moment could already be here according to Reuters financial journalist Tom Westbrook, who said the AI hype story was starting to unravel far away from Wall Street, on the trading floors of mainland China.
The $480 billion wipeout
Mr Westbrook made a video showing China’s main index of AI stocks, the Star 50, has lost 40 per cent of its value in the last four months, or about $480 billion in shareholder value. That compares to around a 6 per cent drawdown in the NASDAQ.
“Some of the most popular AI stocks — the suppliers of optical equipment to data centres, chipmakers, companies that were seen as providing the nuts and bolts of the AI revolution — have seen their share prices collapse by 50, 60, or 70 per cent in the last few months,” he said.
He said the sell-off had happened for a few reasons.
SSE STAR 50 INDEX
“Some people have pointed to tax bills falling due in China,” he said. “Others have said that these stocks were priced for perfection — priced for a global market that never wanted to stop buying these goods.
“Now, investors are starting to worry that the US might not want Chinese equipment in its data centres, and that companies hoping for global revenues might now only find revenue from China.”
He said the crunch will have likely hammered retail investors.
“Many of the companies that have suffered the heaviest share price falls, like the robotics giant Unitree, were extremely popular with retail investors,” he said. “That company was 8000 times oversubscribed at its listing to retail traders.
“Many of those investors bought in after the shares began trading, and the price has since collapsed, leaving them nursing heavy losses and more than a few grudges. Many believed they were making a safe bet by buying into a theme backed by the Chinese government, which gave them the confidence that these shares simply couldn’t fail.”
He said it all shows that the AI trade is changing, and that money is rotating away from suppliers, chipmakers, and builders of equipment that go into AI data centres, as fund managers turn their attention to where the real profits of AI might lie.
AI stocks rise on Wall St
Despite the concerns about what’s happening in China, investors keep piling more money into American AI companies.
Overnight, Wall Street stocks rose for a second straight session behind renewed enthusiasm for artificial intelligence-linked shares as markets awaited a Federal Reserve decision and earnings from big AI players.
Major US indices advanced, led by the tech-rich Nasdaq, which capitalised on AI enthusiasm following Anthropic’s IPO filing while also greeting an announcement from Broadcom about a major new financing deal for AI investment.
“The buy-the-dip trade is taking place,” said Briefing.com analyst Patrick O’Hare. “You have the market being led by the AI stocks and particularly the semiconductors and those larger hyperscaler names.”
In a share-launch filing Monday, Anthropic, the mother company for Claude AI, reported first-half revenue surged about 1,300 per cent year-on-year, but also flagged heavy capital spending ahead.
Investors are awaiting earnings this week from Magnificent Seven members Microsoft, Alphabet and Amazon as well as SK hynix and Samsung.
“The fact that this five year-old company could soon launch a record-breaking IPO helped boost investor confidence, following a decidedly rocky period across AI-adjacent corporations of late,” said David Morrison, an analyst at Trade Nation.
Tech shares were under pressure much of last week on worries that massive AI investments might not pay off and that heavily indebted companies face difficulty due to higher interest rates.
But the markets were more generous this week. Broadcom climbed four per cent after announcing jointly with Citi, Blackstone and Morgan Stanley a $63 billion financing structure to build new capacity for Anthropic.
The Nasdaq piled on more than one per cent, while the Dow edged higher, though pressured in part by a 10.7 per cent drop in Boeing shares after the aviation giant reported results.
Today, Asian markets are rallying after South Korean chip giant SK hynix said its third-quarter operating profit soared 632 per cent on-year, largely driven by the artificial intelligence industry’s explosive demand for its advanced memory chips.
Operating profit for the July-September period was 83.33 trillion won ($62.8 billion), the company said in a regulatory filing.
The firm’s July-September net profit jumped 215.7 per cent from last year to 39.77 trillion won, while sales reached 104.61 trillion won.
“SK hynix analysed that a virtuous cycle has taken hold in which AI-driven productivity gains and new revenue generation in areas such as software development, customer service, and search lead to greater AI adoption,” the company said in a statement.
SK hynix is a specialist supplier of high-bandwidth memory chips to US industry behemoth Nvidia, and a pillar of South Korea’s tech-led economy.
The global race to build AI data centres has transformed the company’s fortunes, despite concerns that the sector may be overvalued.
What’s happening in markets around the world
In London, the benchmark FTSE 100 index was dragged down by HSBC, whose share price fell 5.4 per cent after its bumper profits undershot market expectations.
Mercedes-Benz shed 3.8 per cent in Frankfurt after the German carmaker cut its full-year outlook, underperforming the DAX index which slightly rose overall in afternoon trading. Paris also rose.
Earlier, equities rose in Japan and Korea, also boosted by Anthropic’s IPO filing.
Seoul’s stock market briefly jumped more than four per cent on Tuesday thanks to strong gains in chipmakers SK hynix and Samsung. Tokyo added 1.8 per cent on spikes in Tokyo Electron, Advantest and SoftBank.
“Sentiment towards technology has improved as investors assess Anthropic’s IPO filing at the start of a week packed with corporate earnings and the Federal Reserve’s rate decision,” said Fiona Cincotta at FOREX.com.
IG analyst Chris Beauchamp said “there remains hope that this is a more durable rally than those we saw last week, with thecaveat that there is still an abundance of macro risk to navigate this week.”
The Fed is expected to keep interest rates on hold in a decision on Wednesday US time, though CME Group’s FedWatch tool says there is a 78 per cent chance of a hike when it meets in December as inflation rises.
Those expectations have boosted the dollar.
The European Central Bank and Bank of Japan are also expected to hold tight in announcements on Thursday and Friday.
Oil prices fell amid renewed diplomatic efforts to resolve the Middle East conflict and as Israelis went to the polls in parliamentary elections.
