Q+A: Is the AI investment boom starting to crack?
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Aylmer. Technology stocks have tumbled around the world as investors question whether the enormous spending on AI will deliver the returns they've been expecting. And Australia is not immune. Remember, this is general information only, and you should seek advice tailored to your circumstances before making any investment decision. Damien Bowie is Portfolio Strategist at Wham Leaders, part of Wilson Asset Management, Damien, welcome to Fear and Greed Q&A.
Well, thanks very much, Sean.
Give me a thumbnail sketch of why the market has sold off, tech stocks have sold off in the past couple of months. I mean, you know, Microsoft met probably for longer. And of course, we have some like Micron who have done pretty well. But what is it about tech stocks at the moment that people are worried about?
What factors are causing the recent sell-off in technology stocks?
So there's a few things that I think are worrying people. So obviously we had a bit of a saspocalypse in February, and so people were really buying into some rather bearish narratives about how technology was going to replace people. It was all about displacement and redundancy and obsolescence of certain business models. So since that time, obviously some parts of the tech sector have recovered, like memory and chips, while the software part has generally lagged. Now, what's been really interesting has been the concentration and the crowding risk happening within the memory, the chip space and global equities. So what we've seen recently is the Korean index, for example, the KOSPI, you know, over a period of about five, six months has basically gone up like 80, 90%.
And in that time, the implied volatility of that index has gone up to 80, 90%, which is kind of unprecedented because usually volatility and indices move in the opposite direction. So there are lots of explanations as to what's actually going on there in terms of foreign participation, you know, retail investors deciding to maybe take on leverage to buy this, leave it ETFs. But what it's led to is a very crowded state of affairs globally. And so you could have the butterfly flap its wings in Korea or Taiwan. And what you'll find is that NASDAQ will be down as well because it's just a sheer reflection of the uncertainty and the crowding. And then you've also got Kevin Walsh coming in. And I think the thing with Kevin Walsh is that, you know, he wants to... He being the Fed chair, of course.
The new Fed chair. Yes, that's right. He wants to basically make sure that the Fed's inflation targeting credentials are intact. And although he's been painted as a dovish person, somebody who wants to cut rates, if he must raise rates within the next six months, then he will just to stamp the Fed's credentials on that regard. So what he is looking for and what every other central bank is looking for is evidence that maybe this data center bill that we're seeing globally, maybe this AI capex spend is not as inflationary as people think. that will allow him to kind of pivot a little bit more neutral or maybe even dovish. But the jury's still out on that because the CapEx growth is very strong. It's the biggest contributor to global growth that we've seen.
And you can see that even in the exports data of Korea, Taiwan, and China. So there's the Fed element. And then, of course, you've got all these capital raisings and IPOs. And then people are having to think through, well, if we do burn through this much cash and if we are relying on so much external funding for AI capex, how well would the market digest the issuance? What does the earnings backdrop actually look like as we look at three to five years, let alone the short term? So there's lots and lots of issues.
How is the AI investment landscape impacting global markets?
And what you're seeing in tech at the moment are all of those uncertainties kind of being focused on at the same time. But I think definitely what's happening in Korea has been a bit of a catalyst. And what's happening with Fed Chair Walsh has been a catalyst too.
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