Bubbles are not only forming in the AI ​​sector. Watch out for this rapidly growing segment

Discussions about whether a bubble is forming around the topic of artificial intelligence (AI) are increasingly dominating the statements of the biggest names on Wall Street. However, some people also see a bubble in another area – start-ups developing military drones. We check what has been talked about in the US financial market in recent days.

Ed Yardeni: Falling oil prices will lower bond yields

Yields on 10-year U.S. Treasury bonds could fall sharply with oil prices, according to Wall Street veteran Ed Yardeni, founder and head of consulting firm Yardeni Research. Yields could reach 3.75% if oil prices continue to decline and the US Federal Reserve cuts its key interest rate, as expected. The economist bases this prediction on the long-term correlation of asset classes.

“A growing oil surplus and concerns about a slowdown in the global economy have pushed US WTI oil prices to their lowest level since fuel prices began to recover from the decline caused by Covid-19,” Bloomberg quotes an analysis by an economist. “This will help reduce inflation levels and increase consumer purchasing power.” It would also add strength to the bond market rally. In October, the 10-year U.S. Treasury yield fell to about 4%, or 18 basis points. Let us recall that yields move inversely to bond prices – if their yield falls, prices go up.

Blackstone CEO: Wall Street underestimates the destructive power of AI

Wall Street underestimates the potential of artificial intelligence to eliminate entire industries, Johnatan Gray, president of Blackstone, said at the Financial Times conference in London. Understanding the business risks of AI has become a priority for this private equity group when assessing investments. “We told our debt and equity teams: Talk about AI on the front pages of your investor-facing analytics,” Gray said.

Speaking about concerns about a bubble in AI stocks, he admitted that in the face of such enthusiasm there will be a misallocation of capital – “Remember Pets.com in 2000. People say it smells like a bubble, but they don't ask the question: what will happen to traditional businesses that may be hit,” the manager added. The company he manages not only carefully looks at subsequent transactions through this prism, but also carefully evaluates the portfolio of already owned enterprises. “If we think about regulatory-driven businesses – law, accounting, transfers, or assessing insurance claims – the upheaval will be fundamental,” Gray says.

Head of the Helsing start-up: The bubble is also growing in the military drone sector

Torsten Reil is one of the heads of the German start-up Helsing, dealing with military drones. This company is called one of the most important defense technology companies in Europe. It is developing an AI system capable of managing military aircraft.

According to Reil, a large part of Europe's military budgets still goes to traditional weapons. However, startups in the military drone sector are attracting even some of the funds that previously flowed towards cryptocurrencies. “There's definitely a bubble that has formed right now,” Reil said at the Bloomberg Tech Summit. If a few years ago no one cared about the defense sector, “now everyone wants to secure a position in the defense sector. A lot of money is being invested that will not bring a return.”

Nokia CEO: AI is a supercycle like the Internet of the 1990s.

“Fundamentally, I think we're at the beginning of an AI supercycle, just like we were in 1990 with the Internet,” Justin Hotard, Nokia's chief executive, said in an interview with Reuters. “Even if there is a bubble and then a decline, we look at long-term trends. Currently, they are all very favorable,” he said.

Nokia last year acquired US optical telecommunications equipment maker Infinera and has found a goldmine in the AI ​​space as growing data centers need communications – both optical networks and hardware to provide cloud services. “It's clear that incremental investment in growth is being driven by data centers. This is a big step forward in terms of volume,” Hotard said. While mobile communications equipment remains Nokia's core business, the shift towards AI is the company's biggest change in direction since 2013, when it sold its mobile phone business.

Amundi: We apply the principles from the dot-com bubble

Analysts at Amundi, Europe's largest asset management company, are dealing with the threat of a bubble burst by using the same formulas that worked during the dot-com bubble at the turn of the century. “We are doing the same thing that worked from 1998 to 2000,” says Francesco Sandrini, head of cross-asset class investments at Amundi and chief investment officer at the Italian branch.

The idea is to sell those positions that are nearing their peak and find companies with growth potential that other market participants have not yet noticed. Sandrini noted signs of “irrational enthusiasm” (irrational exuberance), such as, among others, active trading in risky options related to shares of the largest companies related to AI. Still, he expects this enthusiasm to continue, and there will be opportunities to make money by finding stocks that haven't already rallied. He is looking for the greatest growth opportunities that the market has not yet seen among software companies, robotics companies, as well as among Asian technology companies.