In a recent Eurizon SLJ Capital research note, Stephen Jen and Fatih Yilmaz examine whether the surge in AI-related capital expenditure should be viewed as an investment bubble or as a rational response to a highly asymmetric opportunity.
The note argues that the debate around AI investment needs to distinguish between equity market valuations and the real investment cycle. While tech share prices may be vulnerable to sharp corrections, Stephen and Fatih argue that heavy spending on AI infrastructure can still be rational if the payoff structure is convex and non-linear.
As they write:
“Ordinarily, investment/capex is inversely related to uncertainty. But for investments with convex payoff functions, uncertainty justifies investments.”
The paper frames AI infrastructure spending as similar to a call option. The downside may be limited to investment costs, while the upside could include control of platforms, standard-setting power, military relevance and long-term economic rents.
The authors write:
“When the payoff structure makes the investment proposition look like a call option, uncertainty (implied volatility) increases the value of the investment.”
The note also explores the strategic dimension of the AI race. Stephen and Fatih argue that the rivalry between the U.S. and China reinforces the incentive to invest, as both governments are likely to support technologies seen as strategically important.
They write:
“The strategic rivalry between the US and China fundamentally alters the payoff function in favour of the firms engaged in the competition.”
The research also considers Europe’s position. While the U.S. is focused on defining the technological frontier and China is focused on rapid imitation at lower cost, the authors argue that Europe risks falling further behind if it does not adapt to the new competitive environment.
As they conclude:
“Europe will likely choose not to compete for the next three years, by which time it will have fallen further behind, we fear.”
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