This is an audio transcript of the FT News Briefing podcast episode: ‘AI bubble worries spread to Asia’
Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, November 5th and this is your FT News Briefing.
US state and local elections were good to the Democrats and Asian stock markets could be entering bubble territory. Plus, UniCredit keeps stumbling on its journey to become a European banking powerhouse.
I am Sonja Hutson and here’s the news you need to start your day.
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Democrats got some wind in their sails last night; the party won the races for governor in Virginia and New Jersey. Both states leaned democratic in recent presidential elections, but have chosen governors from both parties in recent years.
Yesterday was the first election of President Donald Trump’s second term and it could be a national bellwether. The US will hold midterm congressional elections next November.
The New York mayoral election has also garnered national attention. Democratic socialists Zohran Mamdani won. He beat out former Democratic governor Andrew Cuomo, who ran as an independent.
For more analysis on the results of the election, check out the FT’s Swamp Notes podcast this Friday.
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Some of the froth might be coming off the AI boom on Wall Street. The tech-heavy Nasdaq Composite fell 2 per cent yesterday and the broader S&P 500 declined a little more than 1 per cent. Investors are worried about high-flying valuations of AI companies and how long it’ll take to see a pay-off of major investments in the technology.
Plus, top Wall Street executives warned yesterday that markets are vulnerable to a slide.
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Some Asian investors are worried that the American AI bubble is contagious. That’s because big tech stocks are behind half the gains in some of Asia’s main indices this year.
Here to tell us more is the FT’s Asia Financial correspondent Arjun Neil Alim. Hi, Arjun.
Arjun Neil Alim
Hi there. Thanks for having me.
Sonja Hutson
So tell us more about what investors are seeing in the market that’s making them nervous.
Arjun Neil Alim
So what investors are seeing in Asia is that markets have performed very strongly this year. You know, Korea, Japan, Hong Kong, these are markets that have all provided double-digit returns. But actually, if you look under the hood, it’s a small number of stocks — tech stocks, often with an AI theme — that are driving the majority of returns in these markets.
In Hong Kong, it’s six tech stocks that are responsible for 50 per cent of the Hang Seng’s return this year. In Korea, it’s two stocks that are responsible for 40 per cent of the index’s return. In Taiwan, one stock is responsible for more than half of the return, so it is a very narrow rally that is comparable to how much the Magnificent Seven is driving the S&P in the US.
Sonja Hutson
Right. And some of the stocks that we’re talking about will be familiar names to listeners, Alibaba in Hong Kong, TSMC in Taiwan. Just draw the connection for me from US tech stocks to Asian tech stocks.
Arjun Neil Alim
Clearly, the AI theme is global, so global investors are very excited about the potential for AI to completely revolutionise the economy as well as individual businesses.
In Japan and Korea, it’s mainly the hardware stocks, so chipmakers, foundries, and the supply chain of AI that’s doing very well. Whereas in China and Hong Kong, it’s the internet companies that are driven by a surge of interest in China’s homegrown tech after the DeepSeek moment earlier this year.
So a lot of these companies in Asia that we highlight as contributing to their industry’s returns are suppliers to US companies like Nvidia or Apple. What this shows is if there is a downturn in the US and there is a correction to the AI optimism that is currently infecting the whole market, that will impact not only the US, but also these Asian markets.
Sonja Hutson
What’s the counter-argument here? Is there reason to believe that there will not be a bubble in Asian markets?
Arjun Neil Alim
So the big argument against why you should be worried about Asian tech is the valuations are not in the same place that the US is. If you look at trailing P ratios, US indices are much more richly valued on average than Japanese, Chinese, or Taiwanese indices. So in many ways, there’s much more room to run for these companies.
There are some exceptions to that. You know, I’m thinking of Chinese chipmakers like SMIC, which trades at a very, very high price/earnings ratio. You know, almost as high as Palantir in the US. But overall, yeah, valuations are not in the same place. I’m speaking to you from Hong Kong. This week, we have the Hong Kong monetary authority’s big finance summit and almost no one speaking seems worried about an AI bubble bursting.
Sonja Hutson
What does all this mean for investors ultimately?
Arjun Neil Alim
I guess the big takeaway is, you know, if you are a global investor or an Asian investor who is concerned about an AI bubble or frothiness in tech in the US and you’re diversifying out of the US into Asian indices, you should be aware that Asian indices are being propelled by many of the same themes that we’re seeing in the US.
Sonja Hutson
Arjun Neil Alim is the FT’s Asia financial correspondent. Thanks, Arjun.
Arjun Neil Alim
Thank you very much.
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Sonja Hutson
UniCredit wants to become a European powerhouse bank, but the Italian lender keeps hitting roadblocks for the acquisitions it wants to make. So if it can’t get to this powerhouse status, what does that mean for the bank and its CEO, Andrea Orcel? Here with me to discuss is the FT’s European banking correspondent, Simon Foy. Hey, Simon.
Simon Foy
Hey!
Sonja Hutson
So tell me a little bit about the issues that UniCredit keeps hitting up against as it tries to make some of these deals that I mentioned.
Simon Foy
So in the last year, UniCredit has talked about making a takeover bid for Germany’s Commerzbank and also a bid for its smaller Milan rival Banco BPM.
And in both cases, it has come up against the same issue, which is national political opposition, where the German government has made it very clear that it does not want UniCredit to launch a takeover offer on Commerzbank and the Italian government even went further using a thing called the golden power, which is usually to vet deals that are national security threats to block its deal for Banco BPM. So that is the main issue really in both circumstances, that it’s come up against.
Sonja Hutson
How much of Unicredit’s failure to expand is being blamed on its CEO, Andrea Orcel?
Simon Foy
Well, it depends who you ask because certainly there is some sympathy for Orcel in at least trying to consolidate across Europe and it is something that the European Commission has been pushing for. But there was also quite a bit of criticism of him from people in the industry who say that he misread the political mood and didn’t win support of politicians in advance. For example, the Italian government, for a while now, has been wanting to establish a third, sort of large bank to rival both UniCredit and Intesa Sanpaolo, which is the other large bank in the country.
So I think by not engaging them or not seeking their support prior to the BPM bid, did him no favours, I think in that regard.
Sonja Hutson
How have these roadblocks impacted the overall success of the bank? How’s it doing?
Simon Foy
The bank’s still performing very well, so since Orcel came on board in April 2021, share prices is up over 650 per cent. And this year, it’s up about 70 per cent, which is in line with some other European banks. So he has managed to significantly cut the cost base, made it a more efficient bank. I suppose you’ve also had the backdrop of rising interest rates lifting all boats. But if you look at UniCredit compared to some of its large European peers, for example, you have UBS with a very large wealth management business, or BNP Paribas with a significant investment bank; so UniCredit does lack that fee-generating sort of side of the business that some of its peers have. So you’ve people in the industry now expecting or trying to focus on that side of the business?
Sonja Hutson
Simon, what does this all mean ultimately for UniCredit going forward?
Simon Foy
Orcel’s point to me was that he does not see his ambition as finished, certainly, and he has said publicly previously that he will wait until probably 2027 to decide what to do with at stake in Commerzbank and could still yet launch a bid. But I think it puts his sort of very large M&A ambition, certainly, on hold for now. But he did say that, sort of his dream or his ambition of pan-European consolidation is certainly not dead, and that UniCredit would be the first to do it if it was to happen.
Sonja Hutson
What does he need to do to make that dream a reality?
Simon Foy
I think he needs to, certainly, if he wants to get Commerzbank over the line, he will need to engage with the German stakeholders, then the relatively new German government and sort of Commerzbank itself. He is not, despite having a significant shareholding in Commerzbank, he has not yet sought a board seat, which is something he could do, but I think UniCredit regard that as a very late stage sort of manoeuvre. So they’re certainly not looking at that anytime soon. But I think engagement with the German stakeholders is certainly a top priority.
Sonja Hutson
That’s the FT’s Simon Foy. Thanks, Simon.
Simon Foy
Thank you.
Sonja Hutson
You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.
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