Artificial intelligence (AI) may be a bubble , but that doesn't mean investors should stay out of the opportunity to make a lot of money. It's important to keep in mind, however, that at some point it will burst.
The assessment comes from Dirk Willer, global head of macro strategy at Citi. In a conversation with NeoFeed , he discussed some of the main themes that have been guiding markets and investors, including the fear of many regarding the possibility of a bubble associated with AI.
According to Willer, it's necessary to look on the bright side, considering that the main conditions for a bubble to burst — including a monetary tightening — are not yet on the horizon.
“When you enter a bubble, as we did last year, you should try to figure out how much money you can make from it. Because bubbles generally take quite a long time to unravel,” says Citi’s global head of macro strategy.
This situation means that investments in tech are driving the decisions of global allocators. According to Willer, not even the war in Iran will change that, despite its effects on oil prices.
"If we stay in the $100 to $120 range for another month or so, I don't think that will disrupt the balance of stocks too much," he says.
This "magnet" generated by the tech sector could hinder some of the flow that might come to B3 (the Brazilian stock exchange), with investors looking much more towards emerging Asian countries, which have many companies in this segment. But this doesn't mean the country has fallen off the radar.
“We don’t have a specific recommendation for Brazil because our focus is on technology. And, of course, that leads you to Asia and the United States , not Brazil,” he says. “That said, we have a positive view on the real. We also have a positive view on interest rates.”
Willer, who was in Brazil in May to promote his new book, "Trading Global Markets," which deals with market analysis and investment strategies, addressing macroeconomics, capital flows, currencies, interest rates, and risky assets from the perspective of an institutional trader, also spoke about Europe as a possible investment opportunity after the war, whether the United States is experiencing a credit crisis, and the future of the dollar.
Below are the main points of the conversation:
Another positive year for stocks.
At the beginning of the year, we thought it would be a good year for stocks, driven by technology. The fact that it was driven by technology was a bit outside the consensus. I think an optimistic view for stocks was more consensus; being driven by technology, not so much, because there was a lot of rotation. Investors were selling technology to buy other countries, other currencies, other sectors. We maintained the technology thesis. The war led us to reduce risk in stocks, but we increased it again with the ceasefire. One reason for this is that profit estimates also rose during the war for almost all countries. They rose more for countries with exposure to commodities, like Brazil, or technology, like South Korea and the United States. When the ceasefire happened, we went back to being long on stocks, focused on the United States and emerging Asia to capture the technology theme above all else. We are basically back where we were.
War is not a concern.
There are oil price levels at which profit estimates start to fall. Our economists think that if oil rises significantly above $150, recession fears will increase. If we stay more in the $100 to $120 range for another month or so, I think that won't disrupt the equity balance too much. I've always thought the US government's objective wasn't clear. If the administration wants to get out of the conflict, it can find a justification for it. And the closer they get to the midterms, the greater the temptation to do so. For the stock market to be really impacted, you need a new high in oil. But I prefer to have positions that benefit from the end of the war along with an oil hedge, rather than betting on the continuation of the war.
Europe as an opportunity
On the day a peace agreement is announced, Europe will almost certainly outperform for a few days because it was the region most affected by this oil shock. If you look at where oil goes, who benefits and who suffers the most, you could argue that both Asia and Europe are very affected by this oil crisis. However, Asia has performed very well because of the tech boom. So I think that when there is a peace agreement, investors will first increase their exposure to Europe a little.
Tech rules everything.
Stock markets are highly correlated. The only stock market that has a truly significant chance of rising while the United States falls—and vice versa—is China. Otherwise, markets are highly correlated unless there is a very strong local story unfolding. For example, the Brazilian election could be a very important local story, and the Brazilian market could easily diverge from the S&P. However, we believe the technology sector will continue to drive everything, which is why we concentrate our positions in the United States and emerging Asia.
Maybe AI is a bubble. So what?
When you enter a bubble, as we did last year, you should try to figure out how much money you can make from it. Because bubbles usually take quite a long time to unravel. Secondly, almost all the gains made during the bubble—or at least most of them—end up being given back when the bubble bursts. So yes, you should participate. You need to play on the upside. But be aware that you will give back a good portion of the gains when the time for adjustment comes. Of course, it's very difficult to know exactly when the bubble will peak. Our best guess is that we haven't reached it yet because the sentiment is very different from that of 2000. Another reason to believe that we haven't reached it yet is that the Fed isn't raising interest rates. In 2000, the Fed injected a lot of liquidity in the last quarter of 1999 because it was afraid of the Y2K bug. And that contributed strongly to the Nasdaq rising 50% in the fourth quarter. Then they withdrew that liquidity because, obviously, nothing happened. That contributed to the end of the bubble. So, another reason not to worry too much about the bubble yet is that the Fed isn't raising interest rates.
A favorable confluence of factors in Brazil
Brazil is one of the few countries that can still cut interest rates aggressively. How aggressively is debatable, and that also depends on the war with Iran, but there are certainly almost no other countries with significant interest rate cuts ahead. The second factor is that Brazil received a positive terms-of-trade shock because of the war, on the oil side. And the third factor is that people have become more optimistic about politics as well. Of course, this is a difficult topic to discuss. But I certainly think that investors initially saw the election as something very complicated, and now there is a slightly more positive view of how it might unfold. There is still a lot of uncertainty, of course, but less concern about the election.
Brazil loses to tech (in stocks)
We don't have a specific recommendation for Brazil because our focus is on technology. And, of course, that leads you to Asia and the United States, not Brazil. That said, we have a positive view on the real. We also have a positive view on interest rates. So, in principle, although tactical caution is perhaps needed in the three months before the election, there are few countries with this level of real interest rates. So, at these valuation levels, you need to trade interest rates on the buy side. There's no way to be negative on Brazilian bonds with these rates. The same goes for the real.
No credit crisis in the United States
We don't think [there's a credit crisis in the United States] because there hasn't been a credit boom. If you look at credit as a percentage of GDP, it's basically remained stable or fallen since Covid. Secondly, private credit has taken market share from banks. If there hasn't been a credit boom, it's difficult to have a credit collapse. That said, private credit is clearly sending some worrying signals. But institutions like the IMF have concluded that the sector is too small to impact the market. And I think that's probably correct because bank stocks are doing very well. If there were a problem, the way it would become a problem would be through the transmission of private credit to banks and then to public credit.
Dollar still sovereign
Structural issues are very slow to change. For example, the dollar, given the assessment that the United States may be losing some of its appeal as a reserve currency. This is almost certainly correct, but it's usually a very slow process. If we go back to last year, to "Liberation Day," people thought the dollar would cease to function as a hedge when stocks fell. And that did happen at that time, but it stopped quickly. Against the euro, the yen, and other G7 currencies, the dollar rose. You could say, "Maybe in the past it would have risen even more." Fair enough. It was of a smaller magnitude, but the dollar returned to functioning marginally as a hedge against risk. The way the world views the United States has certainly changed. But structural change is very slow. And the reason is that there aren't many alternatives in the world to the United States, so central banks continue to hold dollar reserves to a certain extent.
