The surge of capital into the artificial intelligence (AI) sector has drawn parallels to the dot-com era, raising concerns about a potential tech bubble. ESG funds heavily invested in tech are benefiting from AI’s growth, but experts urge caution and recommend selective investment strategies focusing on AI adopters and supporting industries.
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The excitement surrounding artificial intelligence (AI) has resulted in a rapid influx of capital into a specific market segment, which has implications for technology-focused environmental, social, and governance (ESG) funds. James Penny, the chief investment officer of TAM Asset Management and an experienced ESG investor, believes that the current enthusiasm resembles the early days of the tech bubble that burst in 2000, causing significant losses. He suggests that companies mentioning AI in their earnings reports experience share price boosts, reminiscent of the dot-com era. Penny believes there is a high probability of the market correcting from its current levels.
The AI frenzy accelerated when Nvidia Corp. announced sales targets that exceeded analyst expectations. This development has particularly benefited ESG funds that rely on technology to reduce their carbon footprint while maintaining growth. Tech stocks make up a significant portion of preferred stocks in Article 9 funds, the highest ESG classification in the European Union.
Data compiled by Bloomberg shows that more than 1,300 ESG-registered funds hold over $20 billion in Nvidia alone. Additionally, there is a subset of ESG fund managers specializing in AI-themed investments, collectively managing approximately $8 billion in assets.
While Nvidia supplies AI processing chips, various tech giants such as Microsoft, Amazon, and Alphabet are involved in developing the technology itself. The market for generative AI products, including tools like ChatGPT, is expected to grow by over 40% annually and reach $1.3 trillion in the next decade.
Penny believes the rush to invest in AI is partly driven by premature bets on the Federal Reserve’s potential reversal of interest rate increases. The anticipation of rate cuts, combined with concerns about a regional banking crisis in the US, has fueled a growth investing trend. Against this backdrop, the sudden surge in AI investments has focused on a few sectors and a handful of stocks, leaving the market vulnerable to a potential recession.
To avoid following the crowd, Penny suggests following the playbook of the 1800s gold rush by investing in the tools necessary for AI development instead of solely focusing on AI manufacturers. This “pick-and-shovel” strategy involves identifying companies that support and adopt AI technology. Memory chips are crucial for deep-learning applications and companies like Samsung Electronics, SK Hynix, Micron Technology, Teradyne, and Advantest are highlighted as potential beneficiaries.
Given the current environment, Penny advises caution in sectors heavily reliant on low-interest rates and a strong economy. He emphasizes that economic downturns disrupt the status quo, and investors should be mindful of the potential risks associated with high-growth narratives.
