When AI re-evaluates

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Core Views:

1. Steady and long-lasting. After the rapid surge in the first half of the year, global asset prices related to AI have recently undergone significant adjustments, thereby affecting the overall risk appetite in financial markets. Is this merely a short-term technical adjustment, or a reassessment of the fundamental nature of AI investment? AI's development logic seems to be learning continuously from humans, but what can humans learn from AI's deductions?

2. During the Internet revolution, once the "information superhighway" was built, marginal costs decreased and even dropped to zero. In contrast, AI relies on aggregated computing power to "achieve miracles with brute force"; even after completing infrastructure and model training, its applications continue to consume large amounts of resources, not to mention the period of heavy capital expenditure. AI's marginal costs may increase—displaying the obvious characteristics of "heavy assets, high debt, and slow returns."

3. Profits for the main global AI companies are currently acceptable, but enormous capital expenditure requirements are weakening free cash flow. If external financing costs also rise, it could increase market concerns about their ability to deliver financially. Unlike during the Internet era, the AI industry chain is a cross-national interconnected system with multiple oligopolistic markets, and any link may cause overall fluctuations.

4. Looking ahead, the long-term trend of technology remains unchanged, but investment is not limited to AI. On a macro level, investment is a function of interest rates. In China, financing costs are slightly decreasing but relatively stable, while changes in corporate investment returns are steeper. With the aim of "stabilizing after decline" in investment, interest rates and return rates will chase and couple with each other. Especially during the protection period of the capital market, fund interest rates appear to be easier to loosen than to tighten.

Main Text:

After the rapid surge in the first half of the year, global asset prices related to AI have recently undergone significant adjustments, thereby affecting the overall risk appetite in financial markets. Is this merely a short-term technical adjustment, or a reassessment of the fundamental nature of AI investment? AI's logic seems to be learning continuously from humans, but what can humans learn from AI's deductions?

1. What kind of investment is AI?

During the Internet revolution, once the "information superhighway" was built, marginal costs decreased and even dropped to zero. In contrast, AI relies on aggregated computing power to "achieve miracles with brute force"; even after completing infrastructure and model training, its applications continue to consume large amounts of resources, not to mention the period of heavy capital expenditure. AI’s marginal costs may increase—displaying the obvious characteristics of "heavy assets, high debt, and slow returns."

The profits of the leading global AI companies are currently acceptable, but growing capital expenditure needs are weakening free cash flow. If external financing costs also rise, it may increase the market's concerns about their ability to deliver financially. Unlike during the Internet era, the AI industry chain is a cross-national interconnected system of multiple oligopolistic markets, where any intermediate link may cause overall volatility.

2. Is investment only about AI?

The long-term trend of technology remains, but investment is not only about AI. At the macro level, investment is a function of interest rates. In China, financing costs are relatively stable and slightly declining, but the changes in corporate investment returns appear steeper.

Looking to the future, the logic of asset allocation between AI and non-AI may be reconstructed. With the aim of "stopping the decline and stabilizing" in macro investment, domestic interest rates and corporate investment returns will chase and couple with each other. Especially during the protection period of the capital market, fund interest rates appear to be easier to loosen than to tighten.

Source: Wuge Economic Notes

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