Susannah Streeter, chief investment strategist at Wealth Club, examines the cautious mood in markets as inflation concerns and questions over AI valuations continue to simmer beneath the surface.
Susannah Streeter, Chief Investment Strategist, Wealth Club.
“Investors are in a wary mood, with some opportunistic buying going on, but inflationary worries and concerns about AI valuations are bubbling in the background. The Footsie is set for a flat start in early trade but China’s buoyant export figures will provide relief that the world’s second-largest economy is proving resilient.
The race is on to extract money out of the roar of enthusiasm for companies providing the backbone to the artificial intelligence revolution. There’s now a hat trick of mega listings on the cards, with OpenAI’s filing for an IPO coming hot on the heels of Anthropic and SpaceX. The research company behind the hugely successful ChatGPT had first-mover advantage, buoyed by an early deal with Microsoft, but Anthropic has gained ground and is tackling adeptly from behind, winning reams of enterprise contracts.
The price of staying at the top of the game is eye-watering for OpenAI – it’s estimated to be spending more than $100 billion a year on the infrastructure and processing power to support its services and power the next generation of AI models. To stay high and dry in its AI fortress, the company reckons that by spending at this level, it will create a moat too difficult to cross for the competition, enabling it to keep raking in revenues and eventually turn big profits. But this is a risk, especially with technological developments moving so fast, and future models not necessarily needing the capacity. The risk is that swathes of this infrastructure could become obsolete.
AI is a relatively new game, the rules have not been fully drawn up – with regulation still playing catch-up – so potential winners and losers are still hard to pin down. Investors should tread carefully amid the coming months of IPO fervour, and take part only if they are highly diversified, and with money they may be prepared to lose given the risks right now.
Inflationary fears are still swirling, which are set to continue to cause jitters around technology stocks, given the potential impact on interest rates. Attacks by Iran and Israel may have ceased, but significant progress is still needed in talks to find a longer-term resolution to the Middle East crisis. Brent crude, the benchmark, has fallen back to trade around $93 a barrel. But even at this level, prices are still 30% higher than before the conflict broke out, and continue to be a burden for companies and consumers around the world.
But China has turned another chapter in its story of resilience amid the fallout from the Middle East crisis and tariff turmoil. Exports have surged 19.4% year on year to a record $376.8 billion in May. The strength of its manufacturing sector is shining through amid concerns about global trade. It seems that concerns over supply chain disruptions and higher energy costs are encouraging firms worldwide to build up stocks, reinforcing China’s role as the dominant supplier of industrial goods. Despite the tariff barriers repeatedly thrown up by the Trump administration, exports to the US strengthened, with shipments rising by more than 35%. There’s little sign that the US is going to wean itself off dependence on Chinese manufacturing any time soon.”
