AI Capex Slowdown Risks and China Tech Rebound

Investors are signaling a shift in sentiment, with record outflows from Korean equities in June and continued selling in July. This trend, noted by Bloomberg Intelligence, suggests a broader caution creeping into markets, particularly among those heavily invested in semiconductors and leveraged ETFs. Thomas Thornton, President of Hedge Fund Telemetry, discussed these market dynamics, highlighting the potential for a slowdown in AI capital expenditures.

Investor Caution and AI Capex Concerns

Thornton pointed to the significant decline in leveraged semiconductor ETFs, such as the SKH two-time levered ETF, which has fallen 73% from its highs. He described a pervasive "gambler's mentality" in markets, including a surge in short-term options and leveraged ETFs, which he believes is becoming unsustainable. This cautious outlook extends to AI capital expenditure, with Thornton predicting that cuts or at least a flattening of growth are likely. He cited instances like Meta Platforms Inc. (NASDAQ:META) leasing out compute power as a potential indicator that some advanced AI models may not be ready, or that companies are seeking to monetize unused resources amidst tightening cash flows.

The broader market context is also a concern. Thornton drew parallels to the tech bubble of 2000, where a leveling off of demand for telecom equipment preceded a market downturn. He believes that while AI has a longer growth path, similar disruptions could emerge. "It's not a matter of if, but a matter of when there's going to be capex cuts or perhaps just no growth given on the guidance," Thornton stated.

The full discussion can be found on Bloomberg Podcast's YouTube channel.

China Tech's Resilience and AI's Future

Despite the cautious tone on global tech spending, Thornton expressed optimism regarding Chinese technology stocks. He noted that ETFs such as the KraneShares CSI China Internet ETF (NYSE:KWEB) and iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) have seen significant rebounds after earlier declines. Thornton highlighted that companies like Alibaba Group Holding Ltd (NYSE:BABA) are actively investing in AI, cloud computing, and consumer AI applications, alongside their core businesses. He believes that China's potential stimulus measures and the development of open-source AI models could prove disruptive to US AI companies, especially if these models offer greater efficiency and lower costs.

"The AI models in the US are expensive. The token prices are still high for the major ones, Anthropic, OpenAI. And so if you have an alternative and it does the job, I think that's going to work," Thornton commented.

Short Bets and Sector Outlook

Beyond the broader market trends, Thornton revealed his short position against Tesla Inc. (NASDAQ:TSLA), citing three years of negative growth and aging vehicle models. He expressed concern over unfulfilled promises from the CEO regarding robo-taxis and the Optimus robot, questioning the company's ability to scale these ventures. "I think there's a long list of promises that haven't been kept from the CEO," he said.

In contrast, Thornton remains bullish on Alphabet Inc. (NASDAQ:GOOGL), specifically due to its Gemini AI model's integration into Samsung phones and iPhones, which he sees as a significant driver for consumer adoption.