History shows, however, that markets ultimately realign with fundamentals \u2013 and when this happens, the correction is often swift and ruthless. The recent correction in AI-related shares serves as a reminder of this timeless lesson for investors.<\/p>\n\n\n\n
A strong conviction in a prevailing trend can generate impressive returns as long as conditions remain favourable, but navigating periods of market stress requires different skills: understanding downside risks, managing leverage and maintaining discipline when market dynamics shift. This also raises questions about \u2018circular investing\u2019, where overlapping relationships between prime brokers, trading firms and venture capital investors can lead to capital and trust reinforcing one another. Much like the concerns regarding \u2018circular financing\u2019 in the AI sector, such dynamics make rigorous, independent due diligence all the more important.<\/p>\n\n\n\n
In light of these market distortions, the rigorous standards traditionally applied by professional investors are particularly relevant. For decades, professional investment has required a track record of performance spanning several years, a clearly articulated investment philosophy, a repeatable process and experienced portfolio managers. Whilst experience is no guarantee of success, it offers something that is difficult to acquire quickly: the judgement and perspective that come from investing across a range of market conditions. When markets are driven more by enthusiasm than by careful scrutiny, there is a risk that these fundamentals will be overlooked and that capital allocation itself will be distorted. Hype may attract capital, but experience, discipline and a robust investment process are crucial when conditions change.<\/p>\n\n\n\n
For most experienced investors, it is unlikely to have been particularly difficult to recognise that the overvaluation of AI-related shares was both real and exceptional. Whilst valuation in itself is not necessarily a trigger, it ultimately represents a limiting factor. Even after this \u2018correction\u2019 \u2013 which in many cases was accompanied by significant percentage declines \u2013 some shares still appear expensive when measured against the most relevant valuation metrics. The data provides compelling evidence that the sell-off was not primarily driven by a deterioration in short-term earnings expectations. Rather, it reflected a reduction in price-to-earnings ratios, a downgrading of valuations, the unwinding of positions and, to some extent, a slowdown in the pace of earnings upgrades. Entire value chains and supply chains, particularly in markets such as Korea and Taiwan \u2013 where numerous smaller, rather speculative \u2018picks-and-shovels\u2019 companies had become market favourites \u2013 were revalued downwards. Bond yields rose, whilst the equity risk premium had fallen to a historic low, leaving investors with ever less compensation for taking on equity risk. In this environment, a revaluation of highly valued AI-related companies was a logical consequence.
Several general market signals also warned of the need for caution. Rising debt, record levels of retail investor participation, leveraged ETFs and sustained media hype combined to create conditions typically associated with speculative excesses. None of these factors on its own leads to a bubble bursting. Together, however, they create an environment in which sentiment can reverse rapidly and losses become self-reinforcing. Excesses gradually accumulate until a tipping point is reached. The same principle can be observed in the markets, where excesses gradually build up until a tipping point is reached and behaviour changes. What begins as a correction or rotation can quickly turn into a self-reinforcing cycle of losses, margin calls and forced sales. Recognising when these tensions are approaching a tipping point is where experience can prove particularly valuable.<\/p>\n\n\n\n
Investors sometimes forget that investing is about timing. Bubbles almost always last longer than expected, attracting more and more followers along the way. Yet when sentiment finally turns, the reversal is usually swift and painful. The real challenge lies not in reacting after the event, but in recognising the warning signs early enough to prepare. The recent correction serves as yet another reminder. Markets change, but investor behaviour rarely does. Our team, which has been investing in emerging markets for more than three decades, has seen first-hand how periods of euphoria can lead to sharp reversals. These experiences underpin a timeless insight: valuation, discipline and risk management remain just as important as the latest market opinions.<\/p>\n","protected":false},"excerpt":{"rendered":"
Financial bubbles are fuelled by compelling narratives, abundant liquidity and the belief that \u2018this time is different\u2019.<\/p>\n","protected":false},"author":5,"featured_media":1447694,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ngg_post_thumbnail":0,"footnotes":""},"categories":[220],"tags":[],"class_list":["post-1447696","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion-leaders-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1447696","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/comments?post=1447696"}],"version-history":[{"count":2,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1447696\/revisions"}],"predecessor-version":[{"id":1447699,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1447696\/revisions\/1447699"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/media\/1447694"}],"wp:attachment":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/media?parent=1447696"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/categories?post=1447696"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/tags?post=1447696"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}