Commodity Watch: Catching Waves Without Wiping Out

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>My first job out of college was as a computer programmer at a telecom equipment manufacturer in Sunnyvale, California. I still remember the ashen look on the executives’ faces when they announced a glut of outdated telecom equipment inventory. They were only six to twelve months behind, but that was enough. The company was ultimately sold to Nortel Networks, which was riding high from the telecom capex of the late 1990s.</p><p>Technology comes at you fast. It breaks things. It breaks portfolios. About three years after Nortel bought the company, its market cap dropped from approximately $136 billion to $14 billion. It was not the only one. Lucent’s near $250 billion market cap evaporated; Cisco never recovered its dot- com market cap high of about $450 billion. 401k’s and investors solely exposed to these companies or to Nasdaq suffered debilitating losses as the NASDAQ lost 78% of its value.</p><p>Crashes happen. And though seared into memory, they are infrequent. But for many, they remain a reference point. Today, there is a debate raging on whether the current AI capex cycle mirrors the telecom cycle of the late 1990s. And honestly, no one knows.</p><p>The similarities are striking. Significant expenditures are being deployed to meet current and future anticipated demand for a transformative technology. The speed and scale has resulted in an intra-ecosystem (circular) of investments and financings, with customer concentration, high valuations and a potential overbuild across the sector. Those factors all led to the telecom bust in the early 2000s: fiber’s utiliszation was at less than 1% across the system; 47 telco carriers went bankrupt and the large equipment makers lost billions in vendor financing when those loans went to zero.</p><p>The differences also seem obvious. The chip customers, today, are mostly some of the largest, most profitable companies ever. Recent reports indicate that most capital expenditure is financed through internal cash flows, although debt usage is increasing. Capacity appears constrained, with JP Morgan estimating data center vacancy at around 1.6%. And, although the numbers are staggering, as a percentage of GDP, the investment amount remains at around 1% of GDP (but getting closer to the telecom spend ratio).</p><p>In the book Optical Illusions: Lucent and the Crash of Telecom, the author quotes a BofA analyst: “At the time it seemed like a logical progression of history: cellular, the internet, the new thing. It was bold, it was risky, it was expensive. And it was wrong.” &nbsp;As the saying goes, diversification remains the only free lunch. For investors with significant exposure to technology and AI, adding a mix of other asset classes may help improve portfolio resilience and reduce concentration risk. After all, non-tech asset classes did just that during the 2000s.</p>