If there’s an AI bubble waiting to burst, I can’t see UK stocks escaping unscathed. Not the way companies are multinational, and global stock indexes are interconnected. But I also don’t see any need to panic.
Nobody can have failed to see the headlines voicing fears of an impending AI sector crash. After all, AI-related stocks make up close to 80% of all US stock market gains this year.
The unpredictable
The problem with predicting a stock market crash is… even though they fear one coming, the experts have no idea when it might be. JP Morgan CEO Jamie Dimon recently suggested a 30% chance of a crash. But he said it could be anywhere between six months and maybe three years ahead.
So what should we do? Ace investor Warren Buffett once suggested we should only buy stocks that we’d be happy to hold if the market closed for 10 years. And that sounds like a good bit of guidance to follow now. Well, always, but perhaps especially now.
His Berkshire Hathaway is sitting on around $340bn in cash right now. So Buffett is clearly being very selective these days. And he should be in a great position to buy stocks cheaply in the event of a crash.
UK tech stocks
I’m thinking similarly, and I’m watching some UK stocks carefully. But it’s not out of panic. No, I’m looking for potential bargains to pick up should they fall in price.
Perhaps the most obvious is Scottish Mortgage Investment Trust (LSE: SMT). This FTSE 100 investment trust invests in a whole load of those high-flying US tech stocks. It counts Nvidia, Meta Platforms, and Amazon among its top 10.
Each one of them, though, makes up a relatively small percentage of the trust’s entire holdings. So it means a diversified portfolio of Magnificent 7 stocks mixed in with a host of others not directly considered AI. I like that.
Decent valuation?
Scottish Mortgage shares are currently selling at a discount to net asset value of around 10%. What that means is we can buy a pound’s worth of underlying tech-stock assets for 90p right now. And that adds another bit of safety buffer to the diversification in the event of a downturn.
There’s a high likelihood of Scottish Mortgage suffering in an AI slump, for sure. But it’s not enough to make me think of selling my shares. And I’d like to be able to top up in the future.
Missed opportunty
I reckon an AI crash could send Rolls-Royce Holdings shares down too. It’s all about the nuclear reactor business, and the hopes for all those data centres that they could help power. I don’t necessarily see Rolls as overvalued right now — maybe closer to fair long-term value. But maybe I’ll get a new chance to buy, after all the chances I’ve already squandered.
My main takeaway from AI bubble fears? Long-term investors should welcome a deflation, and try to save up some cash for all those cheap shares we might be able to buy.
