Wall Street’s tech trade is tumbling, and this time it isn’t just a knee-jerk reaction. After Meta’s latest announcement of capital expenditure, investors are asking a harder question: how much is too much to pay for AI? With big tech firms increasingly tapping the bond market to fund their build-out, lenders are demanding a higher price, and the ripple effects could reach the broader market, said Mark Matthews, Managing Director, Head of Research Asia at Bank Julius Baer & Co.
AI investment cycle and markets
The global equity market’s selloff isn’t just a knee-jerk reaction to earnings. Markets are questioning AI capex, and Meta’s big capex increase was the latest trigger. He says the AI story isn’t over and expects ups and downs in a major technological revolution. He thinks the top isn’t in and would stay invested.
“…if the AI story is over, I think the answer is no,” he said.
However, inevitably, in this kind of major technological revolution there will be lots of ups and downs. The markets are in the middle of a downturn now. But he believes that the top is in, and remaining invested is his strategy.
It is clear that the markets are demanding a higher price from the technology sector if the latter wishes to borrow more. It has been seen that the yields on the bonds that are being issued and the CDS spreads of those bonds than the internal rate of return of these hyperscalers is way above where these bond yields are.
Tech companies can afford to pay these prices. Also, the internal rate of return of tech in general is in the mid-teens.
“I guess the yields can continue to go up, because the tech companies can afford to pay for them. However, that in turn might spook the broader market because these technology bond yields are starting to compete against Treasury yields,” said Matthews.
There’s so much money being issued by technology companies at the long end of the bond market with 20 years’ maturity. Plus, it’s around half the size of the total Treasury market issuance that’s been planned for this year. He believes that indirectly this will start to put pressure on equities because it drives yields in the overall bond market higher.
Moving ahead, Matthews said that there’s a risk of sentiment as the uncertainty around the situation with Iran, and the fact that crude is well above the $110 per barrel mark.
The oil price has something to do with it. “Definitely. I would also say I find it quite remarkable that the Indian stock market is where it is today with Brent crude at $113 a barrel,” said he.
Matthews said he was surprised, in a positive sense, that the Indian market is holding up with Brent at $113 a barrel. He had assumed that anything above $90 would be a big problem for India, so the Nifty’s resilience, in his view, reflects the strength of the country’s economy and its reduced vulnerability to oil.