Are US AI stocks too expensive? Top fund managers: Switching to Chinese tech stocks, UK high-dividend stocks, and global energy.

The warning of valuation bubbles in the US stock market has intensified, with some top fund managers starting to shift funds toward undervalued assets overlooked by the market.

Panmure Gordon analyst Joachim Klement's latest research shows that the S&P 500's Cyclically Adjusted Price-to-Earnings Ratio (CAPE), after adjusting for earnings trends, has risen to 68 times, surpassing any period in history, indicating that US stocks are facing a “price bubble” and an “earnings bubble” simultaneously.

Meanwhile, South Korea’s Kospi Index plunged 5.4% in a single day on July 9, retreating nearly 20% from its historical highs and officially entering a technical bear market. Funds are rapidly pulling out of Korean chip stocks and switching to Hong Kong technology stocks. The Hang Seng China Enterprises Index surged up to 4.5% in a day, and Alibaba’s Hong Kong shares jumped over 13% in a single day.

Facing highly concentrated US AI trades and rising crash risks, Alexander Chartres, fund manager at UK asset management company Ruffer LLP, and Tomiko Evans, CIO of Crossing Point Investment Management, suggest investors achieve effective diversification by allocating to Chinese tech stocks, UK high dividend stocks, and global energy sectors rather than simply turning to cash.

US Stock Valuation at Historic Extremes, High AI Concentration Risk

The problem of high valuations in the US stock market has persisted for years, but the current situation may have reached a new extreme.

Klement noted that the S&P 500's current CAPE ratio is close to the 44 times seen at the peak of the 2000 internet bubble. However, if the fact that current corporate earnings are also far above long-term trends is further corrected, the actual CAPE would rise to 68 times, surpassing any recorded historical level. In other words, the market is paying not only for high prices but also for earnings above normal levels.

The core driver of this situation is artificial intelligence. A few tech giants dominate the major indices’ weightings, and companies are scrambling to invest in AI infrastructure, causing market concentration to reach rare historical levels. Fidelity International portfolio manager Ian Samson pointed out that although AI-driven semiconductor demand is real and sizable, “it is essentially being sustained by about $1 trillion in capital expenditure controlled by a few large tech companies.” Once this spending slows, downside risks will quickly surface.

While the timing of a bubble’s burst is hard to predict, investors can reduce unilateral risk exposure by diversifying sufficiently.

Turning to Chinese Tech: Valuation Lows Combined with AI Option Value

Chartres believes US AI trades have absorbed vast amounts of market funds, in turn highlighting the relative value of other sectors, among which large Chinese tech stocks stand out.

"If you think about who provides cloud computing services globally, it’s basically the US and China, with a few names in each country," Chartres said.

He pointed out that Chinese technology companies possess solid fundamentals, robust revenue growth, and also have substantial “option value” in the AI space. However, their valuations are suppressed to levels far below their US peers due to political risks and weak domestic economic sentiment.

This logic is receiving validation from the market.

Goldman Sachs’ thematic research team previously issued a report, advising clients to shift positions from Korean AI trades to the “Chinese AI value chain”. Funds are flowing swiftly into Hong Kong tech stocks, with Alibaba’s Hong Kong shares up over 13% in one day.

UK High Dividend Stocks: Another Path Away from Tech

For investors seeking to avoid the tech sector altogether, UK equities offer a distinct option.

Tomiko Evans, in discussions with the UK Investment Association, said that the sector composition of the UK market is markedly different from global stock indices. Financials, energy, healthcare, and consumer staples—which feature strong cash flows—account for a bigger share, providing a good hedging tool for portfolios that are overweight in tech.

Energy Sector: A New Hedge Tool in the Era of Inflation

When seeking true hedging assets within a portfolio, Chartres pointed out that heightened inflation volatility greatly diminishes the hedge effectiveness of bonds, while the energy sector fills this gap.

He commented that recent turmoil in the Gulf region reminds the market that surging energy prices often drag down both stocks and bonds, yet fossil fuel sectors can actually benefit in such scenarios.

He further noted that the benefit isn’t limited to oil giants; oilfield service companies may also gain long-term advantages as countries ramp up energy infrastructure investment. “Of course, the oil market could remain sluggish for quite some time,” he said. “But that’s exactly the point of diversification.”

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