What ⁤Happened: The Warning​ from Kuala Lumpur

Christopher Wood, global head of equity strategy at Jefferies Hong⁣ Kong, cautioned against an “AI capex arms race” during the Fortune Innovation Forum in Kuala​ Lumpur, ‍Malaysia on⁤ Tuesday. Wood has a proven track record of identifying speculative bubbles, having correctly predicted the dotcom boom, Japan’s credit bubble, and the U.S. ‌housing bubble before many of his peers. This history lends significant weight to his current concerns.

He pinpointed the beginning of this‍ arms race to ‍2023 with ‍ Microsoft’s investment in OpenAI. Wood argues that the current financial gains from the AI ​boom are disproportionately benefiting companies⁣ providing⁣ the underlying infrastructure,rather than those developing the AI products themselves.

The “Picks and⁤ Shovels” of AI: ⁤Infrastructure vs. Request

Wood emphasizes the importance ‍of investing in what he calls the “picks and shovels” of AI – the companies that supply the essential infrastructure.‍ This includes manufacturers of‌ semiconductors, such as⁣ Nvidia, and those building and maintaining data centers. ⁤These companies have already demonstrated ‌considerable profits⁤ from ⁣the AI surge.

Though,Wood​ expresses ​uncertainty‍ about the future monetization of the massive capital expenditure (capex) being poured into AI. He questions who will ultimately profit from this investment, suggesting a potential disconnect between spending‍ and returns.

The Inevitable Bust? Wood’s Portfolio Repositioning

Wood⁢ believes this situation sets the stage for an almost ⁢inevitable over-investment bust. While the timing‍ of this correction remains unclear, he anticipates ​markets will‌ eventually lose patience with continued high spending without⁣ corresponding results.

Demonstrating his conviction, ⁤Wood has already​ adjusted his investment portfolio. He recently ‍sold his holdings in Nvidia, not necessarily due to concerns about the company’s future prospects,⁢ but as the stock’s five-fold increase already reflected exceptionally high‌ expectations. This move suggests he believes much of Nvidia’s potential​ growth is already priced into the stock.

Shifting Focus‌ to china: Compute vs. Energy

Wood’s current AI exposure is now primarily concentrated in China. He believes Chinese companies are approaching AI⁤ advancement with a ⁤more pragmatic and grounded strategy.

He highlights two critical components for prosperous AI ‍implementation: compute power⁢ and energy. Wood argues that China is significantly ahead in ​energy resources compared to the U.S.’s lead in advanced chip technology. This imbalance,he suggests,gives Chinese companies a competitive advantage.

Interestingly, U.S. semiconductor export controls, implemented as late 2022, ⁣may have inadvertently ⁣bolstered China’s position. By restricting Chinese access to U.S. chips, the policy concurrently deprived ​American​ tech companies of a major customer ​base and spurred China⁢ to develop its own capabilities.