You do not need to be a financial market historian to know that stock market bubbles eventually burst.
The bubble in artificial intelligence (AI) shares looks like it could well have reached that point.
This bubble bursting does have wider implications though, as stock markets have been powered to record highs this year, driven largely by the gains made by a handful of AI companies.
Apple, Amazon, Google-owner Alphabet, AI infrastructure group Broadcom, microchip manufacturer Nvidia, Facebook-owner Meta, Microsoft, Tesla, Oracle and Palantir, have all contributed about 58% of the S&P 500’s $7.7trn market capitalisation gain since the start of the year.
It is therefore a good time for institutional investors to add alternatives to their portfolios to give themselves the best chance of protecting their downside in case the AI bubble fully bursts, as their returns can have a low correlation with equities, according to Bowmore Asset Management.
These alternatives include infrastructure, property, hedge funds and structured products.
A low correlation with the stock market means that if the stock market falls then uncorrelated asset should fall much less aggressively.
“Alternatives like infrastructure, commodities, property, private equity and structured products provide return streams less correlated with traditional markets,” said Bowmore chief investment officer Jonathan Webster-Smith said. “Their role is not to shoot the lights out, but to stabilise portfolios in times of market stress, whilst offering strong return opportunities at particular points in the economic cycle.”
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