LIVE MARKETS-British markets better placed for AI bust than dotcom crash

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BRITISH MARKETS BETTER PLACED FOR AI BUST THAN DOTCOM CRASH

British stock markets couldn't avoid the fallout of the dotcom crash back in the day - but they're a lot more likely to be resilient if the AI trade also crumbles, Capital Economics said in a note.

There's three reasons for that according to Joe Maher, markets economist at the research firm.

Staring with quite a familiar argument, Maher points out that UK stocks were more exposed to the dotcom bubble than they are to AI now.

"Prior to the dotcom crash, the tech sectors, IT and communication services, made up around 30% of the MSCI UK Index versus around 3% now," he said.

Next, Capital Economics says economic activity should hold up if the AI hype dies down - and noted that "the stock market fallout from the dotcom crash was worsened by the US falling into recession in 2001."

Now the U.S. economy is expected to be resilient, and Britain's is also set to hold up, Maher said.

Finally, there are currencies to think about: while sterling held up well compared to other major currencies, the dotcom crash coincided with a broad-based rally in the dollar, which meant the MSCI UK Index fared better in local-currency terms vis-à-vis the MSCI USA Index than it did in dollar terms," Maher said.

"But if the AI boom turns to bust, we expect a shift towards monetary easing from the Fed and a faltering in capital flows into the US to prompt broad weakness in the dollar, including against sterling," he added.

The MSCI UK Index fell by around 40%, in dollar terms, following the Nasdaq’s dotcom-era peak in March 2000, only a bit less than the roughly 50% peak-to-trough fall in the MSCI USA Index.

(Sophie Kiderlin)

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