Bubble warning for South African investors

South African Reserve Bank Governor Lesetja Kganyago warned that there are signs of a bubble inflating in global financial markets.

However, financial experts have noted key differences between the current artificial intelligence (AI) boom and previous technological advancements, which led to bubbles that eventually burst.

While all the ingredients for a bubble are present, there are still opportunities to be found for investors who know where to look.

In his November Monetary Policy Statement, Kganyago explained that aggressive valuations for major technology stocks have accompanied an investment boom in AI.

The governor warned that, combined with lower interest rates and, in turn, cheap credit even for riskier borrowers, financial markets appear vulnerable to a correction. 

“If that happens, emerging markets could suffer from spillovers,” he said, later adding that, by their very nature, bubbles cannot be predicted. “You just know that it will happen at some point.”

“There was a governor who visited South Africa and wanted to go to a game reserve, and he said, ‘Can you please describe an elephant to me?’”

“And we told him, ‘When an elephant approaches, you will know it is an elephant’, and a bubble is almost like that – when it comes, you can see that it is coming.”

The governor’s comments came as investors worldwide have grown concerned about a bubble forming in financial markets, created by the boom experienced in AI.

Major United States technology companies, such as ChatGPT-owner OpenAI and Nvidia, have invested and raised billions, achieving never-before-seen valuations driven by promises of an AI revolution.

However, many financial experts have sought to reassure investors that the boom currently seen in AI is not directly comparable to surges seen in previous new technologies that led to bubbles, such as the railway mania of the 1840s and the dot-com boom of the 2000s.

Foord Asset Management portfolio manager JC Xue explained that AI is transforming industries and reshaping how the world works, communicates and invests. 

“History reminds us that every great technological leap attracts speculative excess,” he said.

“The railway mania of the 1840s and the dot-com boom of 2000 both began with genuine innovation, drew in enormous capital, and ended in overbuild and collapse.”

However, he said there are key differences between these booms and the AI surge that could argue against concerns of a bubble forming.

Bursting the bubble

Xue explained that one key difference between today’s AI surge and the dot-com era lies in adoption speed. 

“In the 1990s, internet use was still novel and profitability distant. Consumers had to buy a computer, go online, learn to navigate the web, and then trust a new eCommerce model before spending a cent,” he said. 

“The long lag between investment and returns made it easy for capital to pour in unchecked.”

However, this lag has disappeared in the AI speculation, as billions of people already have internet-connected smartphones and can use tools like ChatGPT instantly. 

He said that once the computing infrastructure, like GPUs for training and servers for inference, is in place, user adoption and monetisation happen almost immediately. 

“Faster feedback on investment decisions means fewer opportunities for the kind of prolonged overbuilding that defined earlier bubbles,” he said.

Another key difference can also be observed on the supply side, as natural bottlenecks are forming with the AI boom that were not present in previous bubbles.

“The fibre-optic buildout of the dot-com era was virtually unconstrained, with multiple firms laying overlapping networks,” Xue explained. 

“In contrast, the AI boom depends on a handful of critical chokepoints, most notably TSMC’s advanced chip-making capacity.” 

“You cannot simply hire more builders to ramp up chip production – these natural bottlenecks limit how quickly capital can flood into the system.”

Xue pointed out another important distinction – today’s most prominent investors in AI infrastructure are also its first and biggest users. 

He pointed to Microsoft, Google and Meta, which are all are integrating AI directly into their existing businesses. 

“Unlike the internet infrastructure firms of the 1990s, these companies see clear and immediate returns on their investment,” he said.

Opportunities to be found

Xue explained that, despite these key differences, it should be noted that the ingredients for a bubble are present. 

“The race towards artificial general intelligence has become an arms race among tech titans,” he said. 

“Ambition and competition can override caution, leading to redundant investment as each player builds its own vast data-centre network.” 

“At the same time, valuations for early-stage AI firms are beginning to stretch credulity – some AI startups command multi-billion-dollar valuations before earning a cent of revenue.”

Regardless, he said the lesson is familiar for investors – while revolutionary technologies can create immense long-term value, they also breed overconfidence. 

“At Foord, we prefer AI beneficiaries whose valuations remain anchored in reality – companies such as TSMC, Google, Alibaba and Tencent,” he said. 

“The AI revolution may prove more grounded than past manias, but the discipline to distinguish promise from speculation remains as critical as ever.”