Replay of the 1999 Frenzy? Wall Street Uses Dot-Com Era Tactics to Tackle the AI Bubble

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In the face of the frenzy triggered by AI, some large investors are dusting off playbooks from the 1990s, staying wary of the risk of a bubble bursting while trying to get a piece of the feast.

As the U.S. stock market hits record highs and AI chip giant Nvidia’s market value soars past $4 trillion, the feverish atmosphere is making professional investors uneasy. Francesco Sandrini, Head of Multi-Asset at Europe’s largest asset manager Amundi, bluntly says: “What we are doing now is exactly the strategy that worked from 1998 to 2000.” He points to signs of irrational exuberance on Wall Street, such as unusually active trading in risk options related to large AI stocks.

This shift in strategy means money is gradually flowing out of giants like the “Mag7”, searching for the next growth point within the AI ecosystem. Investors hope to profit by betting on relatively reasonably valued assets such as software, robotics, and Asian tech companies, areas seen as having high growth opportunities yet to be fully discovered by the market.

However, this Wall Street “treasure hunt” comes with warnings and disagreements. Some investors worry history could repeat itself, with today’s data center construction boom going the way of the fiber optic cable industry’s overcapacity years ago. Others believe rotating investments within the AI sector is insufficient to hedge risks, and are choosing European assets or healthcare stocks to guard against potential shocks to the U.S. economy should the AI bubble burst.

Learning from History: Rotation Strategies Outperformed the Dot-Com Bubble

History provides a reference for today’s investors. At the end of the 1990s internet boom, some hedge funds didn’t choose to go short, but instead successfully navigated the bubble through agile rotation strategies.

Research by economists Markus Brunnermeir and Stefan Nagel shows that from 1998 to 2000, hedge funds skillfully rode the internet bubble, outperforming the market by about 4.5% per quarter on average, and successfully avoiding the steepest losses after the bubble burst. Their core tactic was to sell off high-priced internet stocks before they peaked and transfer profits into other stocks not yet noticed by ordinary investors.

“Even at the peak of the bubble in 2000, nimble players could make significant profits,” says Simon Edelsten, CIO of Goshawk Asset Management, who believes the current market environment is very similar to 1999. Edelsten participated in telecom company IPOs in 1999. He expects that the next phase of the AI boom will spread from companies like Nvidia, Microsoft, and Alphabet to related industries.

“Pick-and-Shovel” Logic: Striking Gold with Second-Tier Industry Winners

In the current AI “gold rush,” investors are following an old logic: When everyone rushes to mine gold, the steadiest business is selling shovels and picks to the miners.

This means investors are trying to indirectly benefit from the wave of hyperscale companies like Amazon, Microsoft, and Alphabet spending trillions on building AI data centers and purchasing advanced chips, rather than directly buying more shares of these giants.

Simon Edelsten favors IT consulting firms and Japanese robotics groups that generate revenue from AI giants. Kevin Thozet, a member of Carmignac’s investment committee, is reducing his holdings in “Mag7” stocks and building positions in Gudeng Precision of Taiwan, which provides transport boxes for TSMC and other AI chipmakers. Becky Qin, Multi-Asset Manager at Fidelity International, is betting on uranium as her favored new AI trade, since the energy-hungry AI data centers could drive up demand for nuclear power.

Bubble Warning and Diversified Hedging

Although top AI stocks like Microsoft, Amazon, and Alphabet are supported by strong earnings, some investors still see “the ingredients of a bubble.”

Arun Sai, Senior Multi-Asset Strategist at Pictet Asset Management, warns that excessive behavior is almost unavoidable with any new technological paradigm. He’s concerned that the frenzy over building data centers could lead to overcapacity, mirroring the fiber optic cable boom in the old telecom industry. As a hedge, he favors Chinese stocks, believing that rapid advances in China’s AI technology could cool Wall Street’s AI enthusiasm and benefit these shares.

Oliver Blackbourn, Portfolio Manager at Janus Henderson, says he is hedging his U.S. tech positions with European and healthcare assets to guard against the possibility that a collapse in AI stocks could drag down the entire U.S. economy.

He admits that predicting how long the AI boom will last is nearly impossible, as market tops are usually only clear in hindsight. As he puts it:

“Before the bubble bursts, we are all living in 1999.”

Risk DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suited to their specific situation. Any investment made based on this information is at your own risk. ```