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Macroscope | Fears of an AI bubble in Asian stock markets are misplaced
The concentration risk so prevalent elsewhere is mitigated in Asia by a diverse equity landscape and the unique strengths in China
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One of the biggest sources of concern in global stock markets in recent years has been concentration risk. Long before the launch of ChatGPT – the chatbot whose debut in November 2022 stoked a frenzy of excitement about generative artificial intelligence (AI) – the benchmark S&P 500 index was dominated by a clutch of giant technology companies.
In 2019, the 10 biggest companies in the index – led by the “Magnificent Seven” stocks consisting of Nvidia, Apple, Alphabet, Microsoft, Amazon, Meta and Tesla – accounted for more than 25 per cent of the S&P 500’s market capitalisation.
Fast forward to today, and the top 10 stocks constitute 40 per cent of the S&P 500, double their share a decade ago. The degree of concentration is amplified by those firms’ share of the gauge’s earnings before interest and taxes, which has doubled to just over 30 per cent since 2017.
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Many investors worry about the top-heaviness of the S&P 500. Previous sharp and disorderly sell-offs, particularly the bursting of the dot-com bubble in 2000, were exacerbated by market concentration, which “underscored how narrow leadership can amplify downside risk when sentiment shifts”, Guinness Global Investors wrote in an October commentary.
The boom in AI has heightened concerns about concentration, and not just in the big tech stocks. Other sectors – particularly utilities and industrials – have received a fillip from the surge in data centre investment and energy demand.
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An AI bubble, inflated by the massive investment in computing power despite relatively meagre revenues from AI companies and services, is currently the biggest “tail risk” in markets, the results of Bank of America’s latest global fund manager survey show.
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