Highlights: Recently, we’ve seen several articles drawing parallels between the current situation and 2001, due to the strong tech-driven rally, massive capex and the wave of imminent IPOs. But there are plenty of differences with 2001, including today’s still lower tech valuations, healthier balance sheets, stronger profits, a more resilient economy, lower delinquencies and a less restrictive Fed. Among the areas that are worth watching are investors’ use of leverage and the recent outperformance of non-profitable tech, but neither are currently at danger levels. The main risk for investors is that a large section of the economy and the markets are driven by one factor, i.e. AI sentiment. Hence, pulling out all the stops on diversification is key, across asset classes, geographies, sectors, style and issuers.

• In 2001, equity markets’ lofty valuations – in part driven by IPOs of often unprofitable companies – provided the potential for a correction. The actual triggers for that correction included a sharp fall in business confidence, with a recession that started in March 2001, caused in part by the Fed hiking rates to 6.5 per cent when inflation rose to 3.8 per cent. The 9/11 terrorist attacks added to the market weakness, as did Enron’s and WorldCom’s collapse following their accounting scandals
• So while there are loose similarities with the current situation, there are plenty of differences too. Some planned IPOs are pricey and are not currently profitable, but several AI companies that used to be unprofitable have recently turned profitable, as monetisation of AI is improving quickly. In 2001, some IPOs had shaky business models and were not planning to make a profit for several years after floating. The disclosures and the understanding of the business case behind AI are also much better than for the internet in 2001. AI capex is high but there is still a bottleneck in data centres and chips, which will support the earnings power for chips and infrastructure in the foreseeable future. The megacaps that dominate the market are very profitable, creating a solid earnings tailwind. And the Fed is unlikely to hike sharply, reducing the risk from that side
• We expect to see some mild volatility due to multiple headline risks around IPOs, Q2 earnings, rate uncertainty and the macro impact of the Middle East crisis, which could all form excuses for investors to take some profits. But for now, we do not think the environment sets us up for a correction. We manage those risks through diversification and selecting profitable players but continue to tap into the exciting opportunities created by the rapid innovation and capex