00:00Now, Fiona Sincotta is an analyst at Citi Index. Joining us now, hello, Fiona.
00:04So I've got to ask, is this AI bubble starting to burst?
00:09It certainly looks like there are risks that are popping up to the surface and becoming much more prevalent.
00:15I mean, there have been a combination of concerns that really have come to the forefront,
00:19as you mentioned there, sort of questions over increased competition with a company from China.
00:26Then you've got sort of questions over the sustainability of the AI boon.
00:31I mean, you know, there really are huge amounts of investment that are being poured into sort of infrastructure, chips,
00:37data center.
00:38And there are now questions over, you know, this profitability, when it will come about.
00:43And obviously, there are huge amounts of debt being used to finance this expansion.
00:48And this is at a time when interest rates are rising and, you know, financial conditions are tightening.
00:54So it definitely does feel that the situation is becoming a little bit less sustainable.
01:00Do you think it's the debt that's the main thing?
01:03Or is it also about the fact that return on investment is not fully there yet?
01:09I think it's a combination of both.
01:11So, I mean, you know, we are seeing this spill over into the credit markets.
01:15CoreWeave, for example, and our AI cloud provider saw the yield on its bonds issued in June to 15 percent,
01:23so distress levels.
01:24And that sort of really does highlight that the market is questioning whether sort of cash invested will be able
01:31to earn enough to support the debt which is being incurred.
01:35But at the same time, yeah, we're not really getting full insight into what the profitability of these huge investments
01:42could be.
01:43And I think that's why earnings season will be very interesting for the markets to sort of get more insight
01:49into what that profitability will be and what that continued investment may look like.
01:55I mean, you know, I asked you at the beginning, is this the beginning of the burst of the bubble?
02:01Do you think that this might just be a correction and it's going to be a little bit more realistic?
02:06Or do you really see serious, serious problems ahead?
02:11I think it's still a little bit too early to call.
02:14I mean, the risks of a deeper correction have definitely increased.
02:19But I think it remains to be seen really whether this is sort of a short-term adjustment in valuations
02:25or sort of more of a deeper fundamental deterioration.
02:29And I think, you know, earnings will be very much in focus over the coming weeks.
02:33Strong numbers, I think, would be able to calm concerns.
02:36And also stress in the credit markets is also an area that we're very much going to be keeping an
02:41eye on,
02:41particularly as sort of, you know, the financial conditions do tighten.
02:46Yeah. What do you think would reassure investors or is it investment time for people with an appetite for risk?
02:53It does feel like that more so right now.
02:56I think, you know, what we're going to be looking for in order to feel more comfortable out of the
03:00situation
03:01would be signs that inflation is cooling.
03:03Therefore, you know, the Federal Reserve may need to hike interest rates quite so much.
03:09Treasury yields falling, financial conditions easing.
03:12That would help.
03:13Also signs that AI investments really are generating clear returns.
03:18That I think is going to be key to help ease investors' worries.
03:22And then greater stability in the credit markets.
03:25They're going to be the three things that we'll be watching out for in order for this situation to feel
03:29more sort of relaxed for other investors.
03:32Thank you so much.
03:33Fiona Sinkata from City Index.
03:35Thanks.
