The Rise of AI: Opportunities, Obstacles, and Outlooks

Nvidia’s recent earnings report on Wednesday this week, which reports on the Company’s profitability and expectations of future profitability, helped to address some investors’ concerns around the Company. As it is a leader in the AI space, it has also improved sentiment around the outlook for AI’s thematic investment story in general, as the Company’s management reiterated their strong view on further demand for AI hardware and robust growth in AI adoption from a broadening scope of customers.

Cutting through the short-term noise
Stock prices can fluctuate significantly, and it is easy to get caught up in temporary market noise for specific stocks. We see AI as a long-term investment theme, not because of short-term market excitement, but because of its potential to drive sustained economic growth, corporate profits, and productivity gains. However, given the high concentration of a small number of “mega cap” stocks in the US and global equity markets linked to the AI thematic, we are closely monitoring the overall size of the allocation to ”mega-cap” stocks like Nvidia in our portfolios. Diversification as always is a sensible approach to targeting a satisfactory long term investment outcome in an environment of rapid technological and social change.

Are we in an AI bubble?
AI related business’ have attracted massive investment and media attention in recent years, with some predicting AI will revolutionise industries and others warning of overhyped expectations fearing a ‘bubble’ which could burst. An investment bubble occurs when asset prices rise rapidly to levels that are not supported by their underlying value, driven by excessive speculation. We don’t think there is enough evidence currently to claim the market is in bubble territory; strong earnings from US tech companies along with a robust macroeconomic backdrop are supportive of equity returns.

Some investors are concerned echoes of the late 1990s ‘dot-com bubble’ are present, though we feel it is important to highlight a few key differences. Unlike the “new-tech” companies driving the market in the 90s, the AI leaders now are generating substantial profits, and major tech firms are funding investments through cash reserves, as opposed to the excessive borrowing seen in the dot-com era.

While bubbles are often only clear in hindsight, we note that missing out on long-term growth by staying on the sidelines can also be costly.
In summary, AI is an important long-term investment theme that isn’t going away anytime soon. As always, we feel investors should remain focused on long-term value creation and diversification and avoid the emotional highs and lows that can come from excessive focus on short-term market movements.

The Noise

• UK will raise defence spending to 2.5% of GDP by 2027, 0.2% up from the current figure of 2.3%. This equates to spending an estimated £13.4bn more on defence every year from 2027. The Prime Minister said he would fund the military boost spending by cutting the foreign aid budget; UK's aid budget will go from 0.5% of gross national income to 0.3% in 2027. This comes as part of a larger strategy to implement an overall rise to 3% of GDP spent on defence by 2030, which the labour government would plan to implement after the next general election.
• ​The EU announced that it is loosening its rules around complying with climate goals to balance the protection of the planet with economic growth aspirations. Whilst the bloc is known for its world-leading climate goals, this comes hand in hand with regulatory demands that can be challenging for the corporate sector. A good example of this is the 2019 Green Deal, an ambitious set of policies aimed at decarbonising the economy but added significant reporting obligations to companies. The EU highlighted that this simplification does not mean deregulation-- they are reducing the scope so smaller companies no longer fall in the Green Deal’s remit to reduce compliance costs. Brussels have estimated the cost of complying with EU rules at €150bn per year, and this will be reduced by €37.5bn by 2029 with these new reforms to climate regulation.
• The pound rose 1.7% against the dollar in February, marking its strongest monthly performance since September 2024, as the market responds to better-than-expected UK economic data and a reversal of "Trump trades." The pound has also strengthened 1.3% against the euro, with analysts citing Britain’s relative insulation from US trade tariffs compared to the eurozone. Cooling expectations of aggressive Federal Reserve rate cuts and strong foreign demand for UK gilts have further supported the sterling. While inflation remains high at 3%, resilient retail sales and GDP data have eased concerns of stagflation, though economists caution that broader economic recovery remains uncertain.
• ​The US and UK announced they are in talks around a potential trade deal, which could shield the UK from Trump’s trade tariffs. The UK Prime Minister, Sir Keir Starmer, announced that the two allies have begun work on a new economic deal which centres around advanced technology. Past efforts to secure a US-UK trade deal have faltered due to Britain's reluctance to accept American agricultural imports. Even though the UK is part of Europe, it appears it is not facing the same treatment from the US on trade as the EU, which has had trade tariffs threatened at every turn.