Latest Investment Advisor’s Update

30th September 2025

Executive Summary

Markets picked up where they left off last quarter with nearly all countries seeing markets climb further. The US and China led the way against a backdrop of easing concerns about trade tensions and AI continuing to be the predominant equity market theme. The continuing rise of equity markets, including sharp jumps for some stocks, triggered renewed discussion about the possibility that we are entering a new AI-driven bubble similar to the dotcom boom in the late nineties.

In this commentary we will seek to answer two questions:

1. Is AI now in bubble territory; and
2. How do we play AI in the current market backdrop?

1. Bubbles typically have several criteria:

• High concentrations in markets
• Share prices that go up exponentially
• High valuations which are not backed up by fundamentals
• An excess of capital that will never generate a return

Markets are undoubtedly concentrated with the Magnificent 7 (M7) companies currently accounting for 22% of the world stock market. The market capitalisation of these companies is now bigger than that of many major global markets. Share prices of several AI-linked companies have spiked in recent months and are clearly running hot but are perhaps not at the level of previous bubbles. Valuations are definitely elevated with the M7 dragging up the overall market to uncomfortable levels but, again, not to levels seen in the dotcom boom. The amount of capital invested in AI companies is at a level that has never been seen before and it may turn out to be difficult to generate a reasonable return on it, but it is possibly too early to tell on this point.

While all of this is cause for concern, it is important to note that the M7's earnings have kept pace with their share prices and they are exceptional companies, unlike in the dotcom bubble where many drivers of the market were loss making. However, it is likely that the best returns are now in the past, we will see more volatility going forward and that the M7 won't dominate the market forever, but possibly the biggest risk for long term investors is jumping off the AI train too early.

2. Despite remaining bullish on the concept of AI, as a prudent investor we are happy to be underweight the M7 even if we leave some return on the table. We continue to advocate diversification, part of which is investing with venture capital groups who are trying to identify the next great companies that may disrupt the M7 in the future.

We are not as pessimistic about the US's prospects as many commentators and continue to maintain our exposure albeit we are layering in additional diversification in Japan, emerging markets and Asia which all look more attractive from a valuation perspective. We have added short duration credit with yields now significantly higher than a few years back while we continue to avoid long duration bonds given extreme government debt levels. We also continue to stay the course with our private market programme viewing it as a strategic decision that you cannot dip in and out of. Overall, the challenge of calling market peaks is difficult at the best of times and, indeed, as long-term investors our natural position is to remain fairly fully invested. While we see the early signs of a bubble forming in AI, we don't think we are at the end just yet.

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