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Tony Blair was back in the news this week arguing for (among other things) reducing the tax burden and using AI and technology as a way to transform public sector productivity growth. Nothing in these weekly notes is meant as investment advice or, God forbid, political commentary, but I think it is fair to say UK investment, and particularly business investment, has been running too low recently and higher taxes and more government regulation haven’t helped much.
To illustrate this, the chart below was doing the rounds this week showing UK business investment running around $400bn p.a., below a pretty questionable pre-Brexit trend line (don’t worry, I am not going there either). I mention this because just 5 US companies (Amazon, Google, Facebook, Microsoft and Oracle) are expected to spend over twice that on data centres alone in 2027 and 2028:
And the impact of this on markets has been immense. There are a couple of ways to show this. When clients ask me why equity markets are so strong one point I make is that much of the recent gains have matched gains in corporate profits (which is not normal bubble behaviour by the way). And, for the US at least, a lot of this earnings growth is AI investment related:
And, as I wrote here, this is also having an impact on Emerging Markets. Emerging Markets have outperformed all other major markets over the last 18 months. It would be tempting to tell a story of strong economic growth, diversification away from the US and of the continued strength of China here. But none of this is really true. Around a quarter of the MSCI Emerging Markets Index is semiconductors and they have been on the mother of all rallies recently from AI related demand (Korea’s SK Hynix is up 970% over the last 12 months for example). Without this, longer-term Emerging Markets performance has been strikingly pedestrian:
So, are we in an AI bubble? The UK, it seems to me, is not investing enough. The US, on the other hand, is embarking on one of history’s all-time great investment booms. My instincts are that the best course of action is probably somewhere in between. And, in practical IPS terms, I think we have enough AI related exposure (both in the US and Emerging Markets) to be catching this investment boom. On the other hand, I think we have enough other exposure (in the UK and Europe, as well as in boring old bonds and alternatives) to have some diversification. I’d classify this as responsibly being long. And, for now, believing there will ultimately be enough demand to meet the current investment boom that is going on.
But there will, of course, be cycles here. And we will inevitably build too little or too much of what we need for AI before ending up at the right level. For now, the market is panicking that we are building too little and is bidding up all the constrained supply partners. At some point, though, I’d guess we will swing back to worrying about overbuild (which is where we were for much of 2025).
Another way I think about this is you should be worrying about one of two things (but not both at the same time). Either you think this is a classic investment boom which will inevitably be followed by a bust as the optimism bursts (as we saw with railways and in the early 2000s for example). In this case, earnings will fall and this may prove to be a short-term peak for equity markets. Or, you can worry that AI is coming for your job and that it will be harder and harder for our children to find work as AI starts to automate entry level tasks. But this is a world where all the investment going on now will be needed and (I’d hope) your equity investments will provide some sort of cushion. I am more focused on the second scenario today, but much of human history suggests the first one is also pretty likely. As ever, we shall see.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
