Mar Asset believes there are similarities between the current cycle of technology investments, focused on artificial intelligence, and the one that preceded the internet bubble of the 2000s.
In a letter to clients, the Rio de Janeiro-based equity manager said it sees similarities in the “excitement and cognitive noise” in the decision-making of large technology companies.
“Everyone doing the same thing at the same time, does it make sense?” questions the manager.
Mar also mentioned that Nvidia’s earnings revisions, the company that has benefited the most from the AI boom, have followed the same pattern as networking companies in the late 90s.
“Each quarter, the dynamic was ‘beat and raise’, with analysts extrapolating the trajectory of the recent past into the future. Continuous margin expansion, significant growth, additional gains in market share (even though the company already holds around 85% of marginal capex representation in cloud), incorporation of new segments, and so on.”
According to Mar Asset, the ‘AI effect’ of Nvidia has been felt in everything related to the theme, from component companies, servers, memory, information security, to energy generation companies.
Mar Asset noted that these companies have been evaluated with unconventional metrics, such as the percentage of the addressable market, sales multiples, and normalized margins ten years ahead.
“The recent rounds of funding for OpenAI, Anthropic, and other ‘core AI’ companies have also attracted a lot of attention due to the Fear of Missing Out (FOMO) component of highly experienced funds,” the letter says.
“It’s the classic cycle of capex spreading in waves and exciting investors to find the second, third, and fourth derivative of the theme. In 10 or 20 years, when we look back at this time, the winning companies will probably not be the same, or maybe not even have emerged yet.”
Despite the similarities with the pre-internet bubble period, Mar believes that there is an aggravating factor today that makes the situation even more complex: the increasing concentration in global stock markets.
Today, over 40% of the volume on the American stock exchange is traded by quantitative funds and multi-manager hedge funds – the so-called pod shops – which have raised nearly $100 billion in the last five years and operate with an average leverage of 4 to 7 times the capital.
When adding ETFs and indexed funds, the participation is even higher, nearing two-thirds, with the remainder held by individual investors and traditional funds with fundamentalist views.
Mar notes that the primary ‘trade’ that has worked in the past 14 years has been long on growth (usually through technology stocks in the United States) and short on indices or stocks from other sectors.
“We imagine that the exposure of quantitative funds and pod shops to the theme is very relevant, given that the performance of both groups has been quite consistent with the sector’s performance,” Mar wrote.
“When asked about the biggest risks in the market currently, one of the ones that most disrupts our sleep is this combination of an accelerated product cycle focused on a few companies – with the global market cap dominated by large technology companies – in a market where daily volume is no longer dominated by fundamental decisions, but rather by quantitative or acceleration/deceleration of leverage incentives and risk-taking.”
The manager says there are trillions of dollars of liquidity controlled by systems or managers “often misaligned or inexperienced, extremely sensitive to any small price variation, whose leveraged portfolios or automated momentum algorithm-based portfolios help fuel the same themes in a large circular reference.”
As the trade of these funds has worked in recent years, they have raised more resources for the same thesis. The problem, according to Mar, is that the more capital, the harder it is to generate excess returns.
“There are about $2 trillion managed by these funds today, and it would already be difficult if there were decision-makers skilled enough for the size of the challenge, but perhaps almost impossible when the reality is that managers are becoming less experienced, trained by questionable training, with skewed incentives and potentially market biases distorted by long trends,” the letter says.
“Combined with that, we are experiencing the largest technology capex cycle in history, led by the world’s largest market value companies, with no clarity on timeframe or hints about potential profitability or winners in the long run.”
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
