Semiconductors Remain Positive, But Positioning Downgraded to 'Neutral'... The Real Threat Is Not Rates, But Jobs [Issue Interview]

Steve Bryce, CIO of Standard Chartered Group, Interview

AI Sector Sees Gains in Earnings Per Share, Capital Expenditures, and Corporate Profits

Low Probability of AI-Driven Demand Peaking Within 2–3 Years

Policy Shifts May Occur If AI

"The current investment frenzy in the artificial intelligence (AI) industry is different from the dot-com bubble of the late 1990s. In fact, today, stock prices are failing to keep pace with the speed at which corporate performance is improving."

Steve Bryce, Chief Investment Strategist (CIO) at Standard Chartered (SC) Group, emphasized in an interview with The Asia Business Daily on May 8 at the SC First Bank headquarters in Gongpyeong-dong, Jongno-gu, Seoul, that the recent AI bubble debate is "not merely driven by expectations, but is actually leading to improvements in corporate performance and earnings per share (EPS)." EPS refers to 'earnings per share', which is calculated by dividing a company's net income by the total number of shares outstanding.

According to Bloomberg and SC First Bank, if the relative 12-month forward EPS of the U.S. IT sector compared to the U.S. market in the MSCI index was set at 100 at the end of February 1995, the EPS in August 1999, when the dot-com bubble peaked, was below 150, while the relative stock price performance nearly reached 300. This shows the extreme divergence between corporate earnings and stock prices at the time.

In contrast, as of March this year, the EPS stood at 341.2, while the rise in stock prices was only 268.8, indicating that stock prices are lagging behind earnings. CIO Bryce expects that even if the U.S. Federal Reserve raises interest rates to some extent, the IT sector will continue to maintain a positive outlook.

Steve Bryce, Chief Investment Strategist at Standard Chartered Group, is being interviewed by The Asia Business Daily on the 8th at the SC First Bank headquarters in Jongno-gu, Seoul. Photo by Jinhyung Kang

'Profit' Matters More Than the AI Bubble Debate

CIO Bryce highlighted that the flow of capital into the AI sector is actually translating into increased capital expenditures (CAPEX). He said, "At the beginning of this year, we expected the growth rate of AI-related capital expenditures to be around 45%, but we have now revised this up to about 60%," adding, "Corporate earnings are also proving to be robust." He further explained, "Over the next two years, the profit growth rate of technology stocks is expected to be about 45–47% this year and around 20% in 2027. This strong growth trend is being supported by a very powerful AI investment cycle."

Regarding concerns raised in some quarters about the profitability of the AI industry, he expressed a relatively optimistic view. "If you look at the Q1 earnings announcements, some companies are achieving profitability at a much faster rate than expected," he said. "At this point, the key issue is not the bubble debate itself, but rather which companies will emerge as winners and which will fall behind by leveraging AI." However, he does not believe the AI investment boom will last forever. CIO Bryce noted that the current market situation is closer to 1996 than to 1999, saying, "Compared to the dot-com boom, there may still be several years left, and during this time, 'mini-bubbles' could emerge in certain areas."

Semiconductors Remain Positive... But Position Is 'Tactical Neutral'

On the semiconductor sector, which is a representative cyclical industry, CIO Bryce assessed that "structural growth is occurring alongside cyclical economic trends." The semiconductor industry typically experiences booms and busts every two to three years, driven by demand for chip replacements in the IT sector and expansion of data centers. The recent surge in AI investments has led to an explosive increase in semiconductor demand compared to the past, and supply expansion is continuing in response. He said, "Currently, demand continues to pull supply," adding, "While the cyclical nature of the industry may become more pronounced again at some point, it is too early to say that AI-related demand will decline within the next two to three years."

However, the investment rating for the semiconductor sector, which has been one of the key drivers of the recent AI investment boom, has been downgraded from 'overweight' to 'neutral.' CIO Bryce explained, "This does not mean the semiconductor boom is over, but rather reflects the possibility of a short-term adjustment in pace, given how strongly stock prices have risen over the past 18 months." This means that even if earnings meet or exceed market expectations, the perception may be that stock prices are already too high. Citing the case of U.S. network equipment company Cisco, he said, "Cisco has been an excellent company over the past 25 years, but at one point its stock was traded at an excessively high price, and it took 25 years to recover to its previous peak," adding, "A good company does not necessarily make a good investment."

He also warned about the strong concentration in semiconductors, pointing out, "About 50% of the recent gains in the global stock market have come from semiconductors, and in Asia, the share is as high as 60%." He cautioned that, "If one sector wields excessive market influence, shifts in leadership within that sector alone can shake up the entire market."

"A 25bp Rate Hike Can't End the AI Investment Boom... The Key Variable Is How Much AI Replaces Jobs"

CIO Bryce believes that a modest rate hike alone is unlikely to significantly disrupt the current AI investment cycle. He said, "There is certainly interaction among interest rates, economic cycles, and capital expenditures, but the 25bp (1bp = 0.01 percentage point) rate changes currently being discussed in the market are unlikely to end the AI investment cycle," adding, "If the current AI capital expenditure boom is to be halted, rates would have to be raised not by 25bp, but by at least 1–2 percentage points." He continued, "However, given the current economic environment and K-shaped polarization, it would be difficult to justify such a move. AI investment expansion has the potential to significantly boost productivity and economic efficiency, so there is little reason for policymakers to deliberately suppress this by raising rates."

The key variables he is watching are employment indicators affected by AI and abrupt policy shifts by governments. If the impact of AI advancement on the labor market becomes a reality, policy support for AI could be withdrawn, sapping the momentum of the market. CIO Bryce warned, "AI has the potential to reduce the need for many people to be employed in the long run. If at any point the government concludes that 'AI is actually destroying people's lives and jobs,' a very severe bear market for technology stocks could result." He further emphasized, "AI is not just a technology industry issue—it is also linked to national security, economic growth, and the stock market. If interest rates were the key variable for the market in 2022, now it may be how much AI replaces people's jobs."

"Korea's Real Estate Investment Is Excessive... Liquid Assets Should Make Up 70–80%"

Steve Bryce, Chief Investment Strategist at Standard Chartered Group, is being interviewed by The Asia Business Daily at SC First Bank headquarters in Jongno-gu, Seoul on the 8th. Photo by Kang Jinhyung

Regarding the situation in Korea, where 60–70% of household assets are concentrated in real estate, he asserted, "That is an excessively high figure." He said, "Except for China, real estate has been a good vehicle for generating expected or even higher returns in most countries. However, given current demographics and population aging, the real estate share in assets should be reduced to 20–30%."

Instead, he recommended that about 70% of liquid assets be allocated to global blue-chip stocks, U.S. bonds, gold, and other global foundation assets for long-term holding, and that 30% be invested opportunistically in sectors showing recent strength, such as semiconductor stocks and the Korean stock market. He also remained optimistic about holding gold, which he has emphasized previously. Although the price of gold, which soared to $5,400 per ounce, has recently hovered around $4,800 due to the nomination of Kevin Warsh as U.S. Fed Chair and the Middle East crisis in January this year, overall demand remains strong, according to his analysis. CIO Bryce added, "There was a price drop because some central banks sold their holdings, but major central banks still have demand, and the Russian central bank is also investing in gold as a substitute for the dollar," adding, "On a one-year view, we forecast up to $5,500 and are advising clients to expand gold to up to 6% of their liquid assets."

He also expressed a flexible stance on virtual assets, which he had previously viewed skeptically due to uncertainty and high price volatility. He said he now recommends that aggressive investors, such as hedge fund and private credit clients, allocate about 2% to virtual assets. Despite the high uncertainty, he sees value as an investment vehicle given regulatory clarity, active networking by large institutions, and the institutionalization of Bitcoin ETFs. CIO Bryce concluded, "You can't simply sit back and ignore it completely," adding, "I expect the market for virtual assets to be somewhat bullish this year."

This content was produced with the assistance of AI translation services.