Investors deploy 1990s dotcom playbook to navigate AI bubble risks

Major investors are deploying a strategic playbook from the 1990s dotcom era to navigate potential AI bubble risks, shifting from hyped stocks like Nvidia into next-wave opportunities while staying within the AI ecosystem. This approach mirrors successful hedge fund tactics from 1998-2000 that helped investors ride the internet boom while avoiding the worst of the subsequent crash.

The big picture: Professional investors see “building blocks of a bubble” in Wall Street’s AI frenzy but expect the enthusiasm to continue, prompting them to diversify within AI-adjacent sectors rather than exit entirely.

• Asset managers are moving from Magnificent Seven stocks into software groups, robotics, Asian tech, and companies that supply AI infrastructure.
• The strategy involves finding “the highest growth opportunities that so far the market had failed to spot,” according to Francesco Sandrini, multi-asset head at Amundi, Europe’s largest asset manager.

Why this matters: Historical precedent shows that well-timed diversification trades can generate substantial returns during bubble periods without the risk of calling market peaks too early.

• A study by economists Markus Brunnermeir and Stefan Nagel found hedge funds beat the market by about 4.5% per quarter from 1998-2000 during the dotcom bubble by skillfully rotating between stocks.
• These funds avoided betting against the bubble entirely, instead riding it by shedding high-priced internet stocks in time to recycle profits into others before they caught mainstream attention.

Key investment strategies: Investors are targeting companies positioned to benefit from AI spending without direct exposure to the most volatile stocks.

• Fidelity International’s Becky Qin favors uranium investments, expecting power-hungry AI data centers to drive nuclear energy demand.
• Kevin Thozet at Carmignac, a French asset manager, is building positions in Taiwan’s Gudeng Precision, which makes delivery boxes for AI chipmakers including TSMC.
• Goshawk Asset Management’s Simon Edelsten prefers IT consultants and Japanese robotics groups that can capture revenues from AI heavyweights.

What they’re saying: Industry veterans draw parallels between current AI enthusiasm and the late-1990s internet boom.

• “What we are doing is what worked from 1998 to 2000,” said Sandrini, highlighting irrational exuberance signs like frenzied trading in risky options tied to AI stock prices.
• “The odds of this (AI boom) being a bust are very high because you’ve got companies spending trillions and all fighting for the same market that does not yet exist,” warned Edelsten, who worked on telecom IPOs during the dotcom era.
• “We’re in 1999 until the bubble pops,” said Oliver Blackbourn at Janus Henderson, a global asset manager, emphasizing the impossibility of forecasting how long AI enthusiasm will continue.

Market concerns: Some investors worry about potential overcapacity in AI infrastructure, similar to the fiber-optic cable boom during the telecoms bubble.

• Pictet Asset Management’s Arun Sai sees Chinese stocks as a hedge against potential AI disappointments, noting that rapid AI advancements in China could diminish Wall Street’s enthusiasm.
• Despite strong earnings from top AI stocks like Microsoft, Amazon, and Alphabet, investors remain cautious about excessive valuations and market concentration risks.