Jeremy Grantham’s GMO has been regularly warning of an AI bubble for years, even as most market players remain bullish. Now, as concerns about overexcitement begin to dominate the market as a whole, the famous asset management company has reiterated its bearish stance.
“AI looks to us like a classic investment bubble, with sky-high valuations and signs of rampant speculation,” Ben Inker, GMO’s co-head of asset allocation, said in the company’s quarterly letter dated November 21.
He continued: “Investors’ eagerness to get in on the next big thing has driven the price of quantum computing stocks up more than 1,200% over the past year, making Palantir look like a value stock.” “It certainly looks like a bubble to us, but I don’t believe we can convince people who truly believe in the AI version of ‘this time is really different.’
But the call for GMOs is not for the broader market. It is strictly about AI trading. That means they believe there are plenty of opportunities elsewhere in the stock market and don’t need to move a large portion of their portfolio into safer assets, as they would have been wise to do before the crashes of 2008 and 2021.
Inker said that compared to the stock market bubbles of 2000, 2008 and 2021, the current environment most resembles the dot-com bubble.
And that “should reassure agnostic investors,” he wrote. “Dynamic valuation-driven asset allocation saved many investors considerable pain in all three bubbles, but only in 2000 did they avoid significant losses without owning a portfolio that would have been crazy to own under normal circumstances.”
Its portfolio included REITs, international small-cap stocks, government bonds, and emerging market bonds and equities.
Currently, GMO believes the most attractive opportunities lie in developed market value stocks and non-US small-cap value stocks, particularly in Japan.
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“The good news for agnostic investors who are worried that AI is a bubble but aren’t completely convinced is that certainty is not needed today to move to a portfolio that is less reliant on AI trading,” Inker wrote emphatically.
“Many other risk assets trade at fair or compelling valuations, and even if today’s financial market prices turn out to be reasonable, tilting your portfolio away from your AI darling and towards other assets doesn’t mean you have to give up on expected long-term returns,” he added.
Examples of funds offering exposure to the trades described above include Avantis International Small Cap Value ETF (AVDV) and iShares MSCI International Value Factor ETF (IVLU).
