AI bubble worries spread to Asia

0:01Good morning from the Financial Times. Today is Wednesday, November 5th, and this is your FT News Briefing. U.S. 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'm Sonia Hudson, and here's the news you need to start your day.

0:34Democrats 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 U.S. will hold midterm congressional elections next November. The New York mayoral election has also garnered national attention. Democratic Socialist Zoran Mamdani won. He beat out former Democratic Governor Andrew Cuomo, who ran as an independent.

1:17For more analysis on the results of the election, check out the FT's Swamp Notes podcast this Friday.

1:30Some of the froth might be coming off the AI boom on Wall Street. The tech-heavy Nasdaq composite fell 2 % yesterday, and the broader S &P 500 declined a little more than 1%. Investors are worried about high-flying valuations of AI companies and how long it'll take to see a payoff of major investments in the technology. Plus, top Wall Street executives warned yesterday that markets are vulnerable to a slide.

2:06Some 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 Allam. Hi, Arjun. Hi there. Thanks for having me. So tell us more about what investors are seeing in the market that's making them nervous. 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.

2:51It's in Hong Kong, it's six tech stocks that are responsible for 50 percent of the Hang Seng's return this year. In Korea, it's two stocks that are responsible for 40 percent 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 U.S. 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 U.S. tech stocks to Asian tech stocks. Well, clearly the AI theme is global.

3:35So global investors are very excited about the potential for AI to completely revolutionize the economy, as well as individual businesses. In Japan and Korea, it's mainly the hardware stocks. So chip makers, 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 U.S. companies like NVIDIA or Apple. What this shows is if there is a downturn in the U.S.

4:17and there is a correction to the AI optimism that is currently infecting the whole market, that will impact not only the U.S. but also these Asian markets. What's the counter argument here? Is there reason to believe that there will not be a bubble in Asian markets? So the big argument against why you should be worried about Asian tech is the valuations are not in the same place that the U.S. is. If you look at trailing P ratios, U.S. 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.

4:59I'm thinking of Chinese chip makers 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. What does all this mean for investors ultimately? 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 U.S. and you're diversifying out of the U.S.

5:39into Asian indices, you should be aware that Asian indices are being propelled by many of the same themes that we're seeing in the U.S. Arja Neal-Allam is the FT's Asia Financial Correspondent. Thanks, Arjun. Thank you very much.

5:59Unicredit 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 Orchell? Here with me to discuss is the FT's European banking correspondent, Simon Foy. Hey, Simon. Hey. 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. So in the last year, Unicredit has talked about making a takeover bid for Germany's Commerce Bank and also a bid for its smaller Milan rival, Bank of BPM.

6:42And 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 Commerce Bank. And the Italian government even went further using the thing called the golden power, which is usually to vet deals that are national security threats to block its deal for Bank of BPM. So that is the main issue, really, in both circumstances that it's come up against. How much of Unicredit's failure to expand is being blamed on its CEO, Andrea Urchel? Well, it depends who you ask.

7:20Certainly there is some sympathy for Urchel 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 Tessa San Paolo, 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 favors, I think, in that regard.

8:02How have these roadblocks impacted the overall success of the bank? How's it doing? The bank's still performing very well. So since Orchell's came on board in April 2021, share prices up over 650%. And this year, it's up about 70%, 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 also have 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.

8:41So the Unicredit does lack that fee generating sort of side of the business that some of its peers have. So you have people in the industry now expecting Orchell to focus on that side of the business. Simon, what does this all mean ultimately for Unicredit going forward? Orchell'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 its stake in Commerce Bank 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.

9:19But 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. What does he need to do to make that dream a reality? I think he needs to, certainly, if he wants to get Commerce Bank over the line, he will need to engage with the German stakeholders, the relatively new German government, and Commerce Bank itself. He is not, despite having a significant shareholding in Commerce Bank, 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 maneuver.

9:58So they're certainly not looking at that anytime soon. But I think engagement with the German stakeholders is certainly a top priority. That's the FT's Simon Foy. Thanks, Simon. Thank you. 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.