The emerging technology known as generative AI (artificial intelligence) has propelled much of the returns in the equity markets this year. AI emerged three short years ago, when OpenAI introduced ChatGPT. Since then, industry participants have committed hundreds of billions of dollars to its development. Share price valuations for the leading players have skyrocketed. For example, Nvidia, a once obscure maker of computer gaming chips, is now valued at US$4.6 trillion, making it the most valuable public company in the world. In fact, eight of the ten most valuable companies on earth are now U.S.-based technology companies, all being assessed by varying degrees for their exposure to the promise of AI.
Developing and running AI models requires immense amounts of computing power, leading to the acceleration of new data centre construction and a surge in demand for electricity. This has led to an arms race by technology companies which, in turn, has fueled economic growth in the U.S. It is estimated that over 40% of the United States’ GDP growth this year will be driven by spending on AI. Over the next three years, an additional US$3 trillion has been committed to the construction of new data centres.
The incredible potential of AI has generated tremendous “hype” in related segments of the equity markets. As valuations become increasingly stretched, they are beginning to show the markings of a market bubble. Despite its promise, AI spending so far has generated little to no returns. While it remains early days, at some point the trillions being invested must bear fruit, or the valuations of industry participants will materially correct. Legitimate comparisons can be made to the railway bubble (and bust) in Britain during the mid-1800s and the more recent telecom and dot-com meltdown of 1999 and 2000 in North America. In both of these cases, enormous amounts of capital were lost. However, in the longer term, Britain did benefit from well-developed rail infrastructure, and the over-building of fibre optic cable 25 years ago was gradually put to good use.
Whereas valuations of more “traditional economy” companies in many cases remain reasonable, growing speculation and extended valuations of those high-growth/emerging technology names leave them particularly vulnerable to a rapid correction should the overall appetite for risk shift lower. Adding to the risk is the growing reliance on external capital, including the more recent trend involving suppliers investing in their customers and vice-versa. While it remains to be seen how long this phase of the cycle will last, and certain companies in existence today may very well continue to dominate the field, experience suggests this will not be without a material destruction of capital. For now, however, a complacent calm has descended on much of the stock and bond markets. Precious metals remain the outlier, where prices have been bid higher by those looking to mitigate the growing number of risks around trade, fiscal imbalances and currency debasement.
We remain confident that our investment approach, which focuses on companies that are well-funded, often multinational market leaders and as part of a portfolio that is diversified across sectors, should help to provide relative stability during future periods of volatility. Furthermore, we expect this approach will continue to generate solid returns over the investment cycle. We remain defensively positioned, with an elevated level of cash, that we intend to deploy once the risk/reward balance improves.
Third Quarter 2025
The emerging technology known as generative AI (artificial intelligence) has propelled much of the returns in the equity markets this year. AI emerged three short years ago, when OpenAI introduced ChatGPT. Since then, industry participants have committed hundreds of billions of dollars to its development. Share price valuations for the leading players have skyrocketed. For example, Nvidia, a once obscure maker of computer gaming chips, is now valued at US$4.6 trillion, making it the most valuable public company in the world. In fact, eight of the ten most valuable companies on earth are now U.S.-based technology companies, all being assessed by varying degrees for their exposure to the promise of AI.
Developing and running AI models requires immense amounts of computing power, leading to the acceleration of new data centre construction and a surge in demand for electricity. This has led to an arms race by technology companies which, in turn, has fueled economic growth in the U.S. It is estimated that over 40% of the United States’ GDP growth this year will be driven by spending on AI. Over the next three years, an additional US$3 trillion has been committed to the construction of new data centres.
The incredible potential of AI has generated tremendous “hype” in related segments of the equity markets. As valuations become increasingly stretched, they are beginning to show the markings of a market bubble. Despite its promise, AI spending so far has generated little to no returns. While it remains early days, at some point the trillions being invested must bear fruit, or the valuations of industry participants will materially correct. Legitimate comparisons can be made to the railway bubble (and bust) in Britain during the mid-1800s and the more recent telecom and dot-com meltdown of 1999 and 2000 in North America. In both of these cases, enormous amounts of capital were lost. However, in the longer term, Britain did benefit from well-developed rail infrastructure, and the over-building of fibre optic cable 25 years ago was gradually put to good use.
Whereas valuations of more “traditional economy” companies in many cases remain reasonable, growing speculation and extended valuations of those high-growth/emerging technology names leave them particularly vulnerable to a rapid correction should the overall appetite for risk shift lower. Adding to the risk is the growing reliance on external capital, including the more recent trend involving suppliers investing in their customers and vice-versa. While it remains to be seen how long this phase of the cycle will last, and certain companies in existence today may very well continue to dominate the field, experience suggests this will not be without a material destruction of capital. For now, however, a complacent calm has descended on much of the stock and bond markets. Precious metals remain the outlier, where prices have been bid higher by those looking to mitigate the growing number of risks around trade, fiscal imbalances and currency debasement.
We remain confident that our investment approach, which focuses on companies that are well-funded, often multinational market leaders and as part of a portfolio that is diversified across sectors, should help to provide relative stability during future periods of volatility. Furthermore, we expect this approach will continue to generate solid returns over the investment cycle. We remain defensively positioned, with an elevated level of cash, that we intend to deploy once the risk/reward balance improves.