Lombard Odier: ‘We don’t see any bubbles in AI’

“We are not facing a speculative bubble. In fact, I find that the markets are behaving rationally – unlike what happened in 2000 – and are simply becoming more selective with regard to AI: they are penalising companies with unclear earnings and excessive debt.” Michael Strobaek is not the sort of person to be thrown off balance by the volatility seen in the equity markets in recent weeks. In the eyes of Lombard Odier’s global chief investment officer, doubts about the sustainability of valuations linked to artificial intelligence, as well as uncertainties regarding the path of interest rates and rapidly rising public deficits – which are at the root of the market corrections – appear, in fact, ‘entirely reasonable’ and, if anything, represent a sign of maturity: a widespread scepticism that pervades the market and acts as a buffer against irrational behaviour.

Underpinning this line of reasoning is the idea that the rally is built on solid foundations and that prices have moved in a single direction primarily because they have been driven by real and tangible growth in corporate profits within the technology and AI sectors. “There is no blind euphoria,” confirms Strobaek, “and investors are, on the contrary, demonstrating discipline and rationality: companies with opaque earnings or excessive debt end up being punished.” This essentially marks the difference from the past example of the dot.com boom, even though the dynamics remain rather lopsided, given that the ability to generate profits in the billions remains largely concentrated in the United States. “Major groups such as Microsoft, Apple and Alphabet,” acknowledges the expert from the Swiss private banking group, “have the liquidity, scale and customer base necessary to monetise the enormous investments they have made, and for this reason the revaluation of the tech sector is directly reflected in corporate fundamentals.”

Europe, on the other hand, remains on the fringes of this phenomenon, and the fact that it lacks large companies capable of generating profits on a massive scale in the technology sector represents a structural limitation, as well as creating a serious vulnerability. ‘AI is advancing at breakneck speed, forcing millions of people to retrain or leaving them at risk of losing their jobs,’ warns Strobaek, thereby highlighting a critical issue that is often underestimated: “The impact of automation on the world of work,” he adds, “poses a direct threat to the stability of public finances, precisely because in European countries the bulk of tax revenue is derived primarily from taxes on employment.”

This issue directly affects countries such as Italia, France and Germany, which currently lack a clear policy strategy for managing the impact of AI on employment and tax revenue. Added to this is the rigidity of a social model that is struggling to keep up with the times: ‘In Europe,’ explains Strobaek, ‘we continue to discuss reducing working hours to 35 hours or early retirement at 61 or 62, trends that run in exactly the opposite direction to the productivity required by the technological acceleration we are seeing globally.’

The divergences between the two continents are helping to reshape Lombard Odier’s portfolio decisions; the firm maintains an overweight stance on global equities, whilst at the same time repositioning its geographical exposure. “We have recently reduced our allocation to European equities in order to buy US equities, as their valuations have become more attractive,” explains Strobaek, who, on the fixed-income front, tends to rule out any imminent debt crises, despite the deterioration in public finances. The prospect of a gradual return to normal inflation levels and expectations of at most one further interest rate hike by the Federal Reserve at its December meeting (compared with the three currently priced in by the market over the next year) ultimately lead him to anticipate a shift in 10-year Treasury yields to “just below 5 per cent over the next 12 months”.