RPT-ROI-Global funds fear AI investment indigestion: Mike Dolan

By Mike Dolan

LONDON, Nov 19 (Reuters) - The problem with the artificial intelligence investment frenzy is no one's quite sure when enough is enough. And that won't be clear until AI registers some hefty future returns, evidence for which still seems both elusive and hard to predict.

While everyone waits, asset managers have been wincing at stratospheric stock valuations and now suspect indigestion from the vast investment sums being gobbled up by AI and the debt being incurred to finance it.

A pre-programmed 'buy the dip' mentality won't evaporate overnight. But there may be many more weeks like this one.

Without 'proof' of returns that could take years to materialize, incremental news of ever larger amounts being plowed into the AI build-out - numbers that have wowed Wall Street for two years - may now be viewed as a negative as leverage adds to the angst.

The latest monthly readout from global funds polled by Bank of America this week illustrates the mood alongside a resurgent bout of stock volatility.

For the first time in 20 years, the closely-watched BofA survey of global funds showed that a majority of respondents say companies are 'over-investing' - driven largely by concerns about the scale of the AI capex boom.

Reflecting this unease, almost 55% of the funds - who collectively manage almost half a trillion dollars in assets - reckon that long equity positions in U.S. megacaps are once again the 'most crowded trade' in world markets, replacing long gold at the top spot.

What's more, more than 50% still think AI is a bubble, and some 45% of respondents felt that this bubble was now the biggest 'tail risk' for global investments going into 2026 - three times as much as the next biggest risk.

Adding to the anxiety, average cash levels at these funds have now dropped to 3.7% of overall portfolios. BofA's analysts point out that a reading at that level or lower has been registered on only 20 occasions since 2002 - and each time stocks fell and Treasuries outperformed over the subsequent three months.

HOW THE FAIRY TALE ENDS

It wasn't all AI doom and gloom though. Most funds in the BofA survey claimed the technology was already increasing productivity, and over 40% said more widespread AI productivity gains would make them the most bullish for 2026.

But this is perhaps where the problem lies.

Most investors agree that AI will be transformative - eventually - but there's just very little certainty about the timeline and how exactly this progress will be seen in the near term.

Even the more bullish advisers acknowledge a leap of faith is necessary.

UBS, even though it still urged clients to stick with the AI-driven equity story, on Tuesday acknowledged that market nerves about valuations centered on Big Tech's ability to fund the AI expansion even as monetization continues to lag. They also noted the rapid credit build was reminiscent of the dotcom bubble era.

Ultimately, AI's payoff is hard to nail down, a problem compounded by the debt calculations and the chance that emerging problems may lie in the untransparent world of private credit.

But there's no one smoking gun behind this week's market shakeout in truth - and the dodgy visibility is nerve jangling in itself.

In time-honored fashion, the lack of an obvious catalyst for a market reversal is often what spooks people most of all, as everyone is left guessing about what they might have missed and then conclude the fog makes it just too risky when markets are this expensive. If you've already made a killing in this equity boom, why risk it all by being late to get out.

Of course, today's earnings from AI megacap Nvidia may again sprinkle some fairy dust on the whole tale, as any reaction to a company with a market cap near $5 trillion easily becomes a market-wide event. But any market whoosh might be short-lived.

Most investors who were around in 2000 will remember that there was no one obvious trigger for the eventual popping of the dotcom bubble or the brutal two-year bear market that followed - even if the internet itself lived happily ever after.

The opinions expressed here are those of the author, a columnist for Reuters

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