High valuations and debt put sector in danger, while fund also warns on government borrowing and cyber-attacks.
The threat of an AI share crash rippling out across global markets is putting world financial stability at risk, the International Monetary fund has warned.
In its twice-yearly Global Financial Stability Report, the IMF highlighted the sky-high valuations for AI companies along with their increasing debt pile as one reason that risks in the system are “elevated”.
“The consequences of an AI correction could be global,” it warned. Aside from the US, Asian markets would be most exposed, and the UK and euro area potentially more insulated – though investors with US holdings would be hit.
Athanasios Vamvakidis, the deputy director of the IMF’s monetary and capital department, launching the report, said: “The exposure of the rest of the world to US assets, particularly AI, is the highest it has ever been. So, this is supporting the global economy through wealth effects today; but if we get a market correction it could have broad implications.”
It called this trio of factors “plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil”.
The IMF’s analysis underlined the interconnected nature of big AI companies, and the high levels of borrowing being undertaken to fund investment in the sector.
“Weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements,” it said.
Such a reassessment would then “sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers”.
The “magnificent seven” big tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – account for more than 35% of the S&P 500 share index in the US, up from 12% a decade ago, and their total market capitalisation has increased by more than 50% in the past two years.
Yet the IMF warned of “growing evidence” that the successful rollout of AI “may not require investment on the massive scale being undertaken by ‘hyperscaler’ firms”, and “potential economic gains may not be as large as expected”.
The hyperscalers are the companies building the underlying infrastructure for the AI rollout, including many vast datacentres. They include Amazon Web Services, Google, Meta and Oracle.
Shares in semiconductor companies fell on Tuesday after the boss of Broadcom compared many AI investors to “casino” gamblers. Reports that the Chinese memory chip maker CXMT was making good progress on a new chip architecture also hit South Korean tech companies.
The IMF also highlighted the growing leverage, or borrowing, that underpins the current boom and could amplify the effects of a crash.
In particular, it identified soaring debts contracted by the companies themselves; hedge fund investment in the sector; and retail investors borrowing to speculate in AI stocks.
In the event of an AI-led market downturn “these growing sources of leverage heighten the potential for forced selling and surges in equity volatility”, it said.
It also pointed to the prevalence of “circular financing” deals, tying stronger AI companies to weaker partners in the same sector, and potentially exacerbating the impact of a share price correction.
It identified $300bn (£227bn) worth of transactions between hyperscalers and “weaker AI firms” in just the past three years, supplemented by $650bn in debt, in exchange for $1.4tn in future financial commitments.
In London, the chief executive of the UK’s Financial Conduct Authority, Nikhil Rathi, urged every small business across the financial sector to take out insurance to protect themselves against AI-related cybersecurity threats.
He told MPs on the Commons Treasury committee that not all companies would have the resources to pay for access to “frontier” AI models such as Anthropic’s Mythos, which has been released on a restricted basis after it was said to be rapidly identifying gaps in government and corporate cybersecurity systems.
“One message I’d give to every small business: you should consider making sure you are insured,” Rathi said.
(The Guardian)