4 tips for investors looking to protect themselves from bursting bubbles in AI and credit

• Bubbles in AI and credit are beginning to burst, according to David Roche.

• The ex-Morgan Stanley research chief said he believed the bubbles could inflict “serious” damage to the economy.

• His own wealth-protection portfolio includes plays like gold, real assets, and defense stocks.

A scenario that investors have been worried about all year might be unfolding.

David Roche, a strategist at Quantum Strategy and the former head of research at Morgan Stanley, said he believes two bubbles in the market may already be starting to burst, despite talk of the rally in risk assets having further to run.

He sees two spots in the market where the air is coming out of the bubble:

• Credit. Roche pointed to the boom in credit issuance in recent years. Total credit extended to the non-financial sector in the US amounted to around 250% of GDP in the first quarter, according to Bank for International Settlements data.

• AI. Roche pointed to huge investments being poured into generative AI by Big Tech firms. That’s making valuations in the US look “absurd,” especially when compared to similar tech companies in places like China, he said.

  Amazon, Meta, Microsoft, Alphabet, and Apple are on track to spend around $349 billion on capex this year, much of which is directed toward AI infrastructure, according to Business Insider’s analysis of company statements.

Roche speculated that the bursting of the bubbles could result in economic damage similar to what was seen after the Great Financial Crisis. That’s largely due to the fallout in the US credit market, which is the “key” to whether a bubble truly hurts the economy, he said.

“So this is the beginning of something which could have serious economic consequences,” the longtime strategist told CNBC this week.

Roche, who described his own portfolio as geared toward wealth protection, shared a few investment tips to help investors navigate precarious macroeconomic conditions. Here are the top investment plays he recommends:

These assets are “core to any portfolio,” Roche said, referring to how gold in particular is seen as a safe haven and hedge against issues like inflation.

Gold is having a fantastic year amid an aggressive appetite from central banks and investors who are worried about tariffs, inflation, and high levels of debt and deficit spending worldwide. The price of bullion traded around $4,110 on Wednesday, up 53.9% year-to-date.

Roche said he likes real assets, as these are also typically seen as defensive plays.

The VanEck Real Assets ETF is up 20.1% from levels at the start of the year. The provider’s Rare Earth and Strategic Metals ETF is also up 81.9% year-to-date.

Roche said his view of equities is “very negative,” apart from nuclear and traditional defense shares. He pointed to emerging geopolitical conflict around the world as one reason why investors might turn to that area of the market for safety.

The VanEck Uranium and Nuclear ETF is up 49.6% year-to-date and the Global X Defense Tech ETF is up 72% this year.

Roche said he was also “negative generally” on bonds. That’s due to higher debt levels and deficit spending among governments around the world, he said, which makes holding bonds less attractive.

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