By Elliot Gulliver-Needham
A hedge fund run by two analysts who spotted the downfall of Wirecard years before its collapse have made a bold prediction that the “AI euphoria” bubble will pop, while the UK market bounces back into popularity.
Neil Campling and Toby Clothier, founders of Chameleon Global Capital Management, launched their hedge fund last year and have made it their mission to find companies with a “funny smell” like they did with Wirecard.
Campling and Clothier worked together at Mirabaud Securities in 2019, when they became suspicious of Wirecard, a German payments processor, and took a large short position on its stock. The Berlin-headquartered outfit was later embroiled in scandal due to corruption and fraudulent financial reports.
The prime suspect for the duo since launching the new hedge fund in May last year is AI, and the massive hype around the technology’s much-discussed potential to add trillions in value to the economy.
While the managers acknowledged its benefit in some areas, they argued that it often is acting much like “a glorified thesaurus” and the current excitement around it is comparable to the dot-com bubble.
“Is it going to add $40 trillion of economic value over the next ten years, which is what is priced in? No.” said Clothier.
“It seems incredibly obvious to us that the popularity of AI has peaked,” he added, pointing to declining search trends and “fading” consumer excitement towards the field.
However, the market is still “in the grip of AI euphoria”, with Nvidia’s stock price already having risen 23 per cent since the start of the year, meaning that the two were holding off from implementing a full short against it currently.
Instead, the duo said they planned to create a ‘short AI’ basket of their fund as earnings season approached and firms began to admit that it was tricky to find a way to implement AI to boost their profits.
Another long-time target of the two has been Tesla, with the two saying for years that the firm was “valued in a completely insane way”.
The firm has four times the market capitalisation of all other electric vehicle companies combined, meaning that the pair treat it as a proxy for the entire sector.
However, Tesla in particular has caught the eye of the two, with Clothier stating that there has been a “massive sudden fall-off” in Tesla’s success, stating that UK vehicle registration of Teslas fell 66 per cent in December 2023 while US sales have “flatlined”.
Meanwhile, between 20 and 30 per cent of electric vehicle revenue comes from China, and the two found it puzzling why the sector was seen as “red hot” while China is “ice cold”.
In another contrarian take, the two have become quite positive on the UK, comparing it the recent popularity of the Japanese market from investors after years of neglect.
Having endured “ten years of s**t,” Campling argued that the “ridiculous valuations” of the UK market left it ripe for M&A potential, but the only thing preventing this was a “lack of participation and lack of interest from institutions”.
“There’s no flow of funds and the domestic funds are being invested elsewhere,” added Clothier.
However, Clothier was content to sit on a portfolio of strong UK companies that pay “massive dividends” and wait for investors to realise how “incredibly cheap” the UK is in comparison to other countries.
The fund, which has always been high conviction, has now begun to take a more targeted approach, cutting back the number of holdings from roughly 100 to around 40 and focusing on being “diverse but not overgrown”.
Ten years of s**t
One previous success the fund has now begun to cut back was a boon from the popularity of weight-loss drug Ozempic and the resulting crash of firms developing tech and medicine against diabetes.
Clothier said that following the initial success stories of Ozempic and similar drugs, called GLP-1s, the market decided “in a very short space of time” that these firms would soon be obsolete, even as type one diabetes persists and “as you live longer, you need more healthcare”.
As investors decided to “shoot first and ask questions later”, losers of the market surge saw a 50 per cent reduction in market capitalisation, or $450bn in losses, while GLP-1 manufacturers like Eli Lily boomed, gaining 84.4 per cent over the last year.
“Then what happened is, the questions were asked of these companies on conference calls, and the companies were very explicit that this might have a one per cent impact to their revenue growth,” explained Clothier.
As a consequence, the massive losses for these firms has slowly been rolling back, allowing Clothier and Campling to reap the benefits of the market’s hotheadedness.
