Investing.com — Buying the Japanese yen is “the easiest way to play the AI bubble bursting,” BCA Research strategists said in a Wednesday report.
After dipping in late July and early August, the S&P 500 rebounded to near-record levels, while the Nasdaq 100 and U.S. tech stocks recovered much of their earlier losses. However, beneath this recovery lay signs of turbulence, according to BCA strategists.
Since mid-July, the price-to-earnings ratio of U.S. tech stocks has dropped by 8%, while long-duration bond prices have surged by 9%. This shift indicates that U.S. tech stocks’ relative valuation compared to long-duration bonds has fallen by more than 15%.
“A 15 percent slump in relative valuation is a bubble starting to burst,” strategists said in the note.
“For U.S. tech stocks, the price adjustment has been mild so far, largely due to bond prices increasing. The issue is that this adjustment likely has a long way to go and could eventually become much more severe.”
BCA said it recently pointed out the almost perfect relationship between U.S. tech stock valuations versus bonds and the yen (inverted).
In response, some clients have questioned whether this relationship is driven by causation or correlation. But the research firm believes that it is probably neither but rather “reflexive.” By reflexive, BCA means that the yen carry trade sought a safe destination, and since early 2023, that destination has been the consistent rise in U.S. tech stock valuations.
However, from an investment standpoint, this distinction is less important as the conclusion remains unchanged, strategists point out.
Should the valuation of U.S. tech stocks versus bond prices return to early-2023 levels—before the release of ChatGPT 4.0—the yen is likely to strengthen to USD/JPY=130, they said.
In other words, the easiest way to play the AI bubble is to go “structurally overweight the Japanese yen,” they added.
“The complexity of the 60-month (5-year) price trend in USD/JPY has reached the point of collapse that has reliably identified previous structural turning points in early 2012 and late 2015.”
“The breakdown in the complexity of the yen’s structural selloff supports the preceding fundamental argument to buy the yen.”
