BREAKINGVIEWS-The Week in Breakingviews: Signals in the AI noise

By Peter Thal Larsen

LONDON, Nov 2 (Reuters Breakingviews) - Welcome back! Donald Trump rated his summit with Xi Jinping a “12 out of 10”. We gave it a lower score. The confab produced an uneasy truce which did not resolve any of the tensions between the world’s two largest economies. What are we missing? Email me with your thoughts. If someone forwarded you this newsletter, sign up here to receive it every Saturday.

OPENING LINE

“Xi Jinping bought peace for a handful of beans.”

Read more: Trump’s soy reprieve is late to the harvest.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. Companies will spend $2 trillion on enterprise software by 2029, but only $76 billion on AI.

2. Capital spending by telecom operators is set to decline by 2% a year for the next three years.

3. Switzerland’s public debt is just 25% of GDP; private lending is 10 times that figure.

4. U.S. companies with the highest exposure to 18- to 24-year-olds have the worst-performing stocks.

5. Japanese rice prices were up 63% year-on-year in September.

SIGNAL FAILURE

At Breakingviews we spend a lot of time discussing market reactions. Rising or falling share prices offer a clue about how market players are collectively interpreting a piece of news. Of course, they often overreact – and can also be wrong. Isolating a specific reason for a market move is equally tricky. Nevertheless, movements are signals.

In the past week, the market transmitted many strong signals about artificial intelligence. No surprise there. Big tech companies are placing hefty bets on AI with the promise of large but extremely uncertain benefits. Each new piece of information offers clues about which companies might end up as winners or losers. Many are convinced we are living through an AI bubble. But let’s put that to one side for a moment. What messages is the market sending?

The first is that OpenAI is very valuable. That may seem obvious, as the private company behind ChatGPT recently sold shares at a $500 billion valuation. This week, however, it finalised a long-awaited ownership rejig, giving Microsoft MSFT.O a 26% stake. That news lifted Microsoft’s shares by almost 4%, briefly pushing the software giant’s value above $4 trillion. Another beneficiary was SoftBank, which earlier this year agreed to invest up to $40 billion in OpenAI. Its Tokyo-listed shares, which have more than doubled this year, jumped over 3% on the morning after the announcement. Even though OpenAI needs to raise tens of billions of dollars to realise its ambitions, diluting existing shareholders in the process, the market expects its investors to benefit. The anomaly is OpenAI boss Sam Altman, who, in defiance of Silicon Valley ethos, will have no equity in the company.

The second message is that Nvidia NVDA.O has a very powerful halo. The chip darling this week became the first company to reach a market value of $5 trillion after announcing it had $500 billion in bookings for its advanced processors. Boss Jensen Huang also has the power to light up other companies. The market value of Nokia NOKIA.HE jumped by $7 billion on Tuesday, after the Finnish telecom equipment maker accepted a $1 billion investment from Nvidia. Then Huang had a fried chicken dinner in Seoul with the bosses of Samsung Electronics and Hyundai Motor, prompting Korean punters to push up chicken-related stocks. Little wonder that other companies are trying to copy his secret sauce. Shares in Qualcomm QCOM.O jumped 20% on Monday after the semiconductor firm unveiled two new artificial intelligence chips for data centres.

Not all the messages were positive, however. Take Meta Platforms META.O. The Facebook and Instagram owner’s shares dropped by a tenth after it forecast higher-than-expected investments in AI. Mark Zuckerberg’s company will sink almost four-fifths of its cash flow next year into capital spending. It’s perhaps an early warning that investors do not have an unlimited appetite for AI-related investments. Yet the flow of Big Tech spending is keeping Nvidia’s order book backed up and has kept cash-burning OpenAI in business. These market signals may not be consistent.

CHART OF THE WEEK

The private credit boom has deservedly received a lot of attention. Asset managers like Apollo Global Management APO.N and Blackstone BX.N have made waves by using funds to extend credit, shoving banks aside. What’s received less attention is who is putting up the money: American retirees buying annuities. Sales of the products, which were moribund for years, have taken off as Apollo and its rivals offered attractive fixed returns. The question is how long the party lasts.

THE WEEK IN PODCASTS

When delegates troop to Brazil for the latest U.N. climate summit, the mood is likely to be sombre. But there are some bright spots behind the dark clouds. On The Big View I spoke to Adair Turner, chairman of the Energy Transitions Commission, about prospects for carbon pricing and carbon trading, and why the energy demands of artificial intelligence need not be a disaster for the planet.

Over on the Viewsroom, the topic was Argentina. After Javier Milei’s victory in midterm elections, Jon Sindreu and Sebastian Pellejero joined Jonathan Guilford to debate whether the iconoclastic president’s economic plan has also turned a corner.

PARTING SHOT

A tell-tale sign of stock market exuberance is when companies start launching aggressive acquisitions. Novo Nordisk’s NOVOb.CO offer for U.S. biotech Metsera MTSR.O certainly qualifies. The Danish obesity drug giant on Thursday tried to gatecrash rival Pfizer’s PFE.N bid with an unusual approach: it is offering investors $6.5 billion in cash right away, regardless of whether antitrust regulators or shareholders later turn it down. The bold move had even seasoned corporate financiers scratching their heads. Watch this space.

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