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Active Thinking

GAM Investments’ Mark Hawtin explains why, following a surge in AI-related share prices, he is reassessing the ‘picks & shovels’ approach to the sector. Mark also discusses why he is taking advantage of attractive valuations to dig deeper into China’s disruptors.

04 October 2023

Despite all the fundamental headwinds, US equities have pushed higher over the first three quarters of 2023. Even as the Federal Reserve (Fed) raised interest rates to 22-year highs, and hinted that at least one other hike could be on the agenda during the fourth quarter, the market has driven relentlessly higher.

While there has been a focus on quality, and to some degree market capitalisation, the tech-oriented so-called “Magnificent Seven” – that is Apple, Microsoft, Nvidia, Amazon, Tesla, Alphabet and Meta (formerly known as Facebook) – have been in the driving seat. Amazingly, those seven stocks have collectively accounted for around 60% of the S&P 500 index’s returns so far this year. In fact, while the S&P 500 is up by over 7.5% to October 3rd, the S&P 500 Equal Weight index is down for the year, showing that the broader market universe has struggled to make any headway.

Back in May, chip specialist Nvidia’s first-quarter earnings report generated the first real artificial intelligence (AI) performance surge. Nvidia’s blockbuster earnings triggered a 20% jump in its share price and peer Marvell saw a similar move after reporting the following day. More recently, we have begun to get traction in other AI names and more generally the kind of futuristic thematic areas that we very much focus on.

Positioning for turbulence in AI’s rapid ascent

While there is no doubting that so much of the potential of AI is becoming reality, and there has been huge demand for chipsets as people have rushed to build out their capability, we have recently taken the view that the valuations across the infrastructure side of AI have been looking a little ‘bubbly’. A bit like the internet of the late 90s, or even the US railroads in the early 1800s, lots of participants have adopted the ‘build and they will come’ mindset, backing the rapid infrastructure rollout on the basis that the users will follow as a matter of course. But, as investors may recall, valuations can sometimes get very far ahead of reality, and can come back to earth with a bump, even in technologies that see massive subsequent uptake. We have seen fairly strong rates of uptake in AI, and we expect the growth to continue. But we think that following the accelerated ordering of chipsets – to the extent that they have been difficult to get hold of – we think there is scope for an air pocket on the demand side for hardware, at least until such time as end user demand catches up. So while we see potential for some share price turbulence on the hardware side, we have been looking for other ways to capture the theme of AI opportunity, in particular on the AI software-as-a-service (SaaS) side.

Doom-mongering on China presents compelling valuations

From disappointing levels of post-Covid consumer spending, weaker-than-expected economic growth and major stress in the debt-ladened real estate sector, the flow of bad news on China’s economy just keeps coming. But while the relentless flow of gloomy headlines weighs on sentiment towards Chinese equities as a whole, we are taking the view that much of the bad news has already been reflected in valuations. For example, following August’s selloff, news flow from China has remained negative, yet the market has since held up relatively well, suggesting that the bad news is very much in the price. In our view, the shakeout we saw during the third quarter has presented some very attractive stock-specific opportunities, particularly among innovative companies we believe have the potential to disrupt existing markets and industries; one example is freight services via mobile apps. So while favouring Chinese stocks may be counterintuitive to many investors, we take a more pragmatic approach, and see recent broad market weakness as an opportunity to add exposure to our favoured companies at what we see as very compelling levels.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

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