Dirk Jooste | Fund Manager | PSG Asset Management | mail me |
In all the excitement about Artificial Intelligence’s (AI’s) transformative potential for our economies and the resultant efficiency gains, it is easy to forget that a business case is not necessarily the same thing as an investment case.
While technologies can and do transform societies in deep and fundamental ways, it is less clear who benefits from the technology race. Frequently, it is society at large ̶ rather than the companies that dominate headlines ̶ that are the primary winners in the long run.
Technology races are frequently accompanied by capital expenditure (capex) booms. Millions are poured into building the infrastructure needed to exploit the new technology. Markets tend to buy into these narratives. This drives more excitement, which leads to more investment.
The cycle then reinforces itself. However, as with any overcrowded market, market dynamics eventually reassert themselves. The unwinding of these bubbles can also frequently prove painful. Examples include US railroads in the 1880s and telecoms during the dotcom bubble. (Read more about our thinking on this subject here).
Who wins in a capex boom?
Builders and investors typically lose; society benefits.
The AI chapter is still being written
Like other transformative technologies, AI is drawing high levels of investment. What seems to be different this time is a high level of interconnectedness between hyperscalers and the chip companies.
These companies are simultaneously each other’s suppliers, customers and investors. In addition, the CEOs of these companies are facing something of a prisoner’s dilemma. Not following the crowd or opting to scale back in the AI arms race is sure to result in instant irrelevance and a painful market penalty. The market could interpret such a move as an admission of defeat in what has morphed into an existential AI competition.
As long as the proverbial music keeps playing, these companies are sure to continue dancing. This remains the case even if doubts exist about the sustainability or profitability of the current AI build-out. Consequently, the AI capex boom continues to gather momentum despite questions about its long-term returns.
The post-GFC environment contributed to distorted capex spend
The period following the Global Financial Crisis (GFC) saw a low-return, low-interest-rate environment. This environment benefited long-duration assets with low free cash flow yields, such as technology stocks. It also rewarded investors in these sectors. That created more excitement and drove continued investment.
The giant leaps in AI technology over the past few years have sparked fever-pitch excitement. We also saw an intense focus on environmental, social and governance (ESG) factors. This resulted in some sectors being starved of capital, even though we are likely to remain dependent on them for some time to come.
The result has been profound underinvestment in many real-world assets and sectors, such as energy. This occurred even as more investment flowed into mega-cap technology stocks and AI specifically.
Currently, AI infrastructure accounts for more than half of global capex spend over the next five years. This represents US$7.6 trillion of the expected US$14 trillion global capex investment pool. Given such a crowded position, we have to ask whether all investors are likely to be rewarded. This remains an important question even if the technology itself has enormous transformative power for society more broadly.
With the companies themselves priced for perfection, even small disappointments have the potential to translate into market re-pricings and investor pain.
Cumulative incremental capex 2026-2030, USD trillions
Alternatives to getting caught up in the AI capex boom (and bust)
We want to be careful about where in this capex boom we invest. This is not because the benefits of AI are not real. Rather, history has shown time and again that capex cycles can be brutal if you are caught on the wrong side. Therefore, we are looking to underappreciated areas of the market.
We seek mispriced, quality assets that pass our 3M investment process. This approach can help us participate in the broader opportunities created by the AI capex boom without simply following the most crowded trades.
While the trade in AI infrastructure may be crowded and hyped, many companies in support industries are set to benefit from the AI build-out indirectly. These companies continue to trade at very attractive valuations. We have found investment in energy supply companies an especially attractive prospect.
In addition, a more fragmented and contested world will require a multi-year build-out of supply chains and energy security. These are precisely the physical, real-asset sectors that were overlooked in the post-GFC era.
Crucially, this global capex surge requires enormous upfront financing. This places structural upward pressure on global yield curves as corporate and sovereign debt markets absorb unprecedented issuance.
Finding ways to avoid the fallout
In an environment where elevated capital costs and rising term premia pose severe valuation risks to overpriced US equities and long-dated growth plays, we explicitly prefer the short-duration profile of high free-cash-flow yield businesses. These businesses generate immediate cash flow today.
Beyond dedicated energy holdings, we are finding exceptional value across select developed and emerging markets. These range from value-rich European and UK counters to Brazil and our domestic exchange.
Here, both primary energy producers and diversified commodity miners face structural supply constraints. These constraints follow a decade of underinvestment. Alongside deeply discounted industrial and financial businesses, these real-asset plays stand as prime beneficiaries of this physical global build-out.
They also trade at low valuations. This offers a compelling margin of safety relative to expensive US alternatives.
Capex cycles are unforgiving; avoiding overpriced assets is key
Market history has shown time and again that capex cycles can be unforgiving. However, a disciplined review of the market environment reveals that many opportunities remain available to investors.
These opportunities often exist outside the most popular and crowded trades. A price-sensitive, bottom-up stock picker like our Asset Management is well positioned to help investors navigate a complex and evolving investment landscape.
The objective is to unlock value while avoiding over-allocation to expensive assets that are already priced for perfection. This disciplined approach recognises both the opportunities and risks associated with the AI capex boom.
