AI Bubble Necessary for Adoption, Won't Cause Prolonged Market Crash: Viktor Shvetz

Artificial intelligence is experiencing a capital-fueled bubble that mirrors previous waves of transformative technology, but this phenomenon is both inevitable and necessary for widespread adoption, according to global strategist Viktor Shvetz. Speaking at the CFA Institute India Investment Conference, Shvetz argued that unlike previous tech bubbles, the current AI surge is unlikely to trigger a prolonged market crash due to abundant capital availability.

AI Bubble Characteristics and Market Impact

Shvetz explained that every general-purpose technology, from railways to telecommunications, requires substantial capital investment to drive adoption and achieve scale. The current AI landscape reflects this pattern, with massive investments particularly concentrated in hyperscale infrastructure development.

"We have abundant capital, not shortage… If you have abundant capital, that not only cushions the economies, but it also cushions the market," Shvetz noted. While AI valuations could experience sharp, short-term declines, such corrections are expected to be much shallower and shorter than past technology bubbles.

Global Innovation Landscape Shifts

The strategist highlighted significant changes in the global innovation ecosystem, expressing concerns about recent US policy decisions. He warned that policy changes over the past four months have undermined America's traditional strength in combining inventiveness with innovation.

"The United States over the last four months was shooting itself in the foot, both in terms of clusters and in terms of funding our fundamental research," Shvetz observed.

In contrast, he praised China's innovation capabilities despite limited inventiveness. "Over the last 40 years, China invented absolutely nothing. But it has been the world's greatest ever innovator of products and services," he said, noting that machines increasingly drive innovation, reducing the necessity of personal freedom in the innovation process.

Structural Risks and Productivity Challenges

Despite the optimistic outlook for AI adoption, Shvetz identified several structural risks facing major economies. Both China and the US are pursuing the challenging goal of achieving 5% productivity growth with zero inflation, a target that could take a decade or more to accomplish.

China faces particular challenges with massive overinvestment and misallocated capital, while the broader market may be underestimating AI's implications for labor, capital, and social stability.

Indian Market Implications

Turning to India's financial markets, Shvetz warned that equity markets are underpricing long-term structural risks associated with AI adoption. He emphasized that fund managers can only value quantifiable factors, often overlooking less tangible but significant risks.

"Equity fund managers can only value what they can value. They don't look at things they cannot value, and those things come back to bite you," he explained.

The strategist stressed the importance of implementing policies to manage inequalities and support workforce skilling initiatives. Without such measures, the benefits of AI-driven growth could remain concentrated among limited segments, leaving large portions of the workforce excluded from prosperity gains.

Long-term Outlook and Recommendations

Shvetz concluded that while the AI bubble serves a crucial function in driving technology adoption and infrastructure development, stakeholders must prepare for extended transition periods. The gap between current massive investments and meaningful productivity gains suggests that markets and policymakers need realistic timelines for AI's transformative impact.

The analysis suggests that successful navigation of the AI transition will require balanced approaches that harness the technology's potential while addressing its social and economic disruptions through appropriate policy frameworks and workforce development initiatives.