ESG Expert Warns of AI Hype Resembling Dot-Com Bubble

The rapid influx of capital into a small sector of the market due to the excitement surrounding artificial intelligence has significant implications for ESG funds that focus on technology.

According to James Penny, chief investment officer at TAM Asset Management and a veteran ESG investor, the current mood is reminiscent of the early days of the tech bubble that burst in 2000 and burst more than 70% of the Nasdaq.

“Companies that even mention the word artificial intelligence in their earnings are going to see their stock price go up, and it smacks very much of the dot-com era,” Penny, who invests in mutual funds rather than directly in stocks, said in an interview. “I think the market has gone a little over the skis. I’d put much higher odds on it coming from here.

The race to ride the artificial intelligence boom went into turbo mode last month after Nvidia Corp. surprised the market with a set of sales targets that surprised even the most positive analyst forecasts. The company has added nearly 30% to its market value since the announcement in late May, pushing this year’s gains to more than 160% and helping the Nasdaq gain a third.

Nvidia’s optimistic forecast buoys Tech

It’s a development that has helped grow funds with environmental, social and governance missions, as ESG portfolios increasingly rely on technology to reduce their carbon footprint without sacrificing growth. Analysis by Bloomberg Intelligence shows that technology makes up a third of the preferred shares in so-called Article 9 funds, the highest ESG rating in the European Union. That is by far the largest share of all sectors.

About 1,300 ESG-registered funds hold more than $20 billion in Nvidia alone, according to data compiled by Bloomberg. At the same time, there are some ESG fund managers who market themselves as AI-themed. According to Bloomberg, there are 20 with a total of about $8 billion in assets under management as of early June.

Federated Hermes treasurer Martin Todd says AI is “moving so fast” that “no one really knows” where things will end up. “There aren’t many industries where it’s very clear that it’s either a beneficiary or a risk,” he said. Todd owns both Nvidia and Microsoft in the Federated Hermes Sustainable Global Equity Fund he manages.

While Nvidia supplies the chips for AI processing, the technology itself is being developed by several tech giants, including Microsoft Corp., Amazon.com Inc. and Google parent Alphabet Inc. The market for generative AI products, which refers to tools such as ChatGPT, according to BI senior analyst Mandeep Singh, who can create content such as text or images at a prompt, has the potential to grow more than 40% annually and reach $1.3 trillion over the next decade.

Penny, who has about a decade of experience picking assets based on their ability to outperform in a world shaped by environmental and social risks, says the desire for exposure to artificial intelligence is partly fueling premature bets that the Federal Reserve will begin to withdraw its holdings. rate hike cycle.

As the U.S. grapples with a regional banking crisis, “the market very quickly accelerated into this scenario where interest rate cuts are coming pretty soon because this is clearly evidence that the economy is broken,” Penny said. This “increasingly accelerates income for growth investments.”

Against that backdrop, “you had this AI trend that literally came out of nowhere,” and now “the market has gone into the races, like massively in,” he said.

But the buying spree has been fueled by “only a few sectors,” just a handful of stocks, in fact, Penny said. At the same time, the risk of a recession remains, he said.

Instead of betting on the same AI names that others are buying, Penny says he’s following the playbook of the 1800s gold rush, when the smart money didn’t waste time looking for gold, but instead invested in the tools needed to dig it. it up.

“I think you’re going to see a huge wave of AI-led products in the market, and we’re looking at that, but you have to be very selective,” Penny said. “I would focus less on the AI makers and more on the AI adopters for a ‘pick and shovel’ type of strategy. That’s where you’ll always find “phenomenal companies that support the theme and the movement,” he said.

Memory chips, critical to deep learning applications needed to support generative artificial intelligence, are one such area, according to a Bloomberg Intelligence analysis that singled out Samsung Electronics Co., SK Hynix Inc. and Micron Technology Inc.

BI also pointed to semiconductor testers Teradyne Inc. of the U.S. and Advantest Corp. of Japan as stocks likely to benefit from the frenzy surrounding artificial intelligence.

And in the current environment, the goal is not to be too exposed to the downside, which is heavily dependent on low interest rates and a strong economy, Penny said.

“What creates a recession is tearing apart the status quo,” he said. “So one has to be careful about that narrative of rapid growth.”