(Nov 19): Artificial intelligence (AI) developers’ ambitious spending plans and rapid user adoption indicate the global rally in their stocks will persist despite bubble concerns, according to Fidelity International.
The recent downturn in global semiconductor stocks, ahead of Nvidia Corp’s closely watched earnings later this week, is likely temporary, according to Joseph Zhang, a portfolio manager at Fidelity International. Unless AI capital spending or usage slows, he expects a rebound following such a correction.
“It’s still in the early stage of the party,” said Zhang, who co-manages over US$10 billion ($13.02 billion) of assets at Fidelity. “It will be wrong to jump off the party too early.”
The view reflects staunch optimism among a group of investors, even as concerns over stretched valuations spurred a sell-off among prominent AI stocks. Bulls see the boom as a once‑in‑a‑generation tech revolution, making it harder to dismiss as just another stock trend. Heavyweight commitments such as Jeff Bezos’ new AI venture are also helping.
AI capabilities
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Hartwig Kos, the head of growth multi-asset at Allianz Global Investors, shares the view. Few have a clear grasp of AI’s potential and investors don’t yet understand all its capabilities, he said, adding that it’s too early to “proclaim it a bubble”.
For those who shrug off AI bubble concerns, signs of a genuine slowdown — such as weaker capital expenditure, lower utilisation or a tech breakthrough reducing demand for data centres and chips — haven’t emerged yet.
Earnings at AI-related firms and memory chip prices continue to climb, and rising criticism of “circular investment” among AI companies overlooks the view that the AI revolution requires collaboration to build a new ecosystem, according to Fidelity’s Zhang. “Over the medium term, we are quite positive on overall tech and AI cycles,” he said.
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Still, if stock losses further pile up, such confidence will be tested. After six months of gains, US-listed semiconductor stocks saw profit taking in November. A US chip gauge has dropped 9.4% this month, on track for its worst showing since March, while a Bloomberg index of Asian peers also fell more than 7%.
“I think with AI, overall we are probably getting a little bit too over-exuberant about it,” said Mark Boulton, the lead portfolio manager of Pictet Asset Management. “We will probably be disappointed and have to reset when that happens.”
Another manager at Pictet also said his once-maximum bullishness on Asian semiconductor names has faded. “We were massively overweight,” said Young Jae Lee, a senior investment manager at Pictet. “Back then, I could see over 50% upside for all those mega-cap AI semi names. Our team’s conviction on AI compared to back then can’t be the same because now I have less upside for the same stocks.”
Buying protection
Signs reminiscent of the dot-com bust have begun to surface, and staying bullish on AI means looking past such flashing warnings. The so-called “Magnificent Seven” — a group of US tech giants including Nvidia, Microsoft Corp and Apple Inc — account for much of the S&P 500’s gains. As of earlier this month, Nvidia alone was valued higher than the combined value of the entire stock markets of Italy, Spain, the United Arab Emirates and the Netherlands.
In Asia, investing in the sector may demand even greater faith in the technology to offset the region’s unique macro headwinds, ranging from trade tensions to China’s wobbly economy.
Still, Zhang attributes some of the recent selling to hedging activities ahead of Nvidia’s earnings. Investors likely bought put options for protection, and that may be weighing on the market, he said.
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If Nvidia’s results hold up, investors will “close out of hedges and the market will likely rebound”, he predicted.
The global AI bellwether now trades at 29 times 12-month forward earnings. But its valuation looks “reasonable” given robust growth, and its key Asian suppliers, Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics Co are even cheaper, Zhang said.
“As long as these fundamentals do not change, some liquidity-driven corrections are generally buying opportunities,” he said.
Uploaded by Tham Yek Lee
