Hyperion warns investors risk missing AI boom without owning Wall Street giants Meta, Microsoft and Amazon

Investors risk missing out on the next decade’s biggest share market returns if they fail to own Wall Street’s technology giants, according to Brisbane-based fund manager Hyperion Asset Management.

The fund manager that has built a $13 billion investment empire based on its reputation for making money in technology stocks believes the AI revolution is still in its early stages and will deliver a substantial productivity boost to the global economy.

“We believe the economic logic that underpins this new [AI] industrial revolution is straightforward. Intelligence drives value creation,” says Hyperion’s Chief Investment Officer Mark Arnold.

“Each increment in AI capability, from chatbots that draft, to agents that act, to humanoid robots and autonomous vehicles that work in the physical world, raises the productivity of existing labour and decision-making, lowers costs to consumers and enterprises for existing products, and creates new products and value that did not previously exist.”

The argument was on display on Wall Street on Wednesday, when shares in Facebook, Instagram and WhatsApp owner Meta jumped 5 per cent at the open following the launch of an AI-based agent called Muse.

Productivity boost

Hyperion insists tomorrow’s sharemarket winners will be the companies that already possess the scale, cash flows and market dominance over internet commerce.

“We believe the market is underestimating not only the returns but also the flexibility of the returns on the investments the leading technology players such as Alphabet, Amazon, Microsoft, Meta, SpaceX and Tesla are making,” Arnold says.

The optimism comes after a difficult year for Hyperion, whose technology-heavy investment strategy has been hit by the collapse in valuations of software companies.

Its Global Growth Companies Fund has lost 5.5 per cent over the past year, compared with a 10.4 per cent gain for the benchmark MSCI World Accumulation Index.

Over 10 years, the fund has returned 16.9 per cent per year, ahead of the index by 2.8 per cent.

New markets

Over the past year, the S&P/ASX 200 has gained just 2.2 per cent as higher global bond yields, interest rates and inflation concerns weigh on investors.

The tech-heavy Nasdaq, by contrast, has climbed 16.9 per cent, helped by the performance of the US mega-caps at the centre of the AI boom.

“We believe AI is accelerating revenue and earnings for companies that are investing heavily in its use,” says Arnold.

As AI begins to lift productivity and create entirely new markets, Hyperion suggests it will crank US economic growth.

“That results in cheaper existing goods and services, new products, scientific and medical discovery, more personalised information, and commercial activity that was uneconomic or impossible without AI,” Arnold says.

Sceptics warn AI is debt iceberg, investment bubble

The bullish view on AI is largely shared by the market, but some professional critics still warn the mania has all the hallmarks of a classic bubble.

Florida-based asset manager GQG Partners, which manages about $US156 billion, has compared the boom with the collapse of internet-linked stocks in 1999 and the shale oil boom, when valuations soared despite many companies generating little or no profit.

It also warns much of the AI boom is built on a “debt iceberg” where the risks are hidden from investors but likely to sink them if interest rates climb.

Another concern is circular financing, where a larger company lends to or invests in a smaller business that then uses the capital to purchase products or services from its investor.

“Across the AI ecosystem, the rapid expansion of data centres and hardware investment is testing the limits of traditional financing strategies, raising concerns about financial sustainability,” GQG warns.

“We believe the parallels to past speculative bubbles are difficult to ignore with aggressive expansion driven by cheap capital, inflated valuations based on future promises, and a lack of focus on sustainable profitability.”

In particular, GQG is sceptical about fast-rising neocloud businesses such as CoreWeave that are funding their plans to build data centres by taking on debt.

Hyperion takes the opposite view, backing the economics of companies such as Coreweave and arguing that the enormous spending on AI infrastructure will ultimately generate returns.

It also dismisses concerns that mega-cap technology companies such as Alphabet, Amazon and Meta could become free-cash-flow negative as they commit hundreds of billions of dollars to AI infrastructure.

“AI will expand the economy in real terms, not merely reallocate it,” Arnold says. “This industrial revolution is only just beginning, and a lift in trend growth over the next decade should significantly enlarge key addressable market.”