AI Revolution bigger than FED
Macro, Central Banks, Bonds
At the beginning of the year, the consensus among experts was that there would be six interest rate cuts. However, following strong economic data in the first quarter, the consensus has shifted to expecting only three rate cuts. Looking ahead, we believe that there may ultimately be only one or even no rate cuts in 2024, given the robust economy and rising inflation, particularly in commodities and food prices.
Why should the Federal Reserve (Fed) take the risk of further fueling inflation through rate cuts when the economy is performing well and inflationary pressures are evident in commodity prices? This scenario presents a win-win situation for investors:
1) If there are no rate cuts, it suggests stronger-than-expected economic growth.
2) If the Fed does decide to cut rates, it could potentially stimulate growth further while keeping inflation in check.
The importance of central banks, such as the Fed, may be overstated at this stage. Contrary to conventional expectations, an increase in interest rates from 0% to 5% has not slowed down economic growth; instead, it has accelerated. How is this possible? This paradox can be attributed to factors such as increased liquidity and most important growing impact of artificial intelligence (AI) on the economy.
We believe that the AI revolution will have a profound impact on the economy in the coming years, surpassing the influence of central bank policies. This suggests that regardless of short-term fluctuations caused by Fed decisions, the broader trend driven by AI will shape economic outcomes. Our view is that rates do not matter now becuase „AI revolution is bigger than FED“
The US economy currently appears to be in a "Goldilocks" environment, characterized by a significant drop in year-over-year inflation, accelerating GDP growth, and a robust job market.
As we see rates being higher for longer than expected due to strong economy we find BONDS unattractive in coming AI revolution growth years.
Is AI bigger than Internet? What does it mean to capital markets?
Firstly i would suggest everybody to watch 17.03.2024 NVIDIA Key Note Conference (2hours) – it is worth it. It shaped my view.
Nothing is bigger than Internet without the Internet. AI's benefits to companies and its potential impact on capital markets could exceed those of the Internet. I predict that AI's impact will be the most significant revolution I have witnessed, at the age of 37*. The Internet serves as the platform for AI to achieve a larger impact than the Internet itself. I am confident that companies or individuals who do not stay informed about AI's impact or fail to adopt AI technology will lag behind their peers..
The Transformative Potential of AI: Shaping Industries and Markets
1. Automated Software Production: Supercomputers, particularly Large Language Models (LLMs), are poised to automate software production. This shift promises increased accessibility, reduced costs, and accelerated growth in the tech industry.
2. Accelerated Research and Development: AI tools will boost productivity across industrial and technological sectors. Increased efficiency and cost savings are expected to drive margin expansion, resulting in higher earnings per share and bolstering stock markets.
3. Enhanced Productivity Across Industries: AI tools will spark up produactivity in Industrials, Tech and most of the industries. Higher produactivity and fewer cost meaning margin expansion. Higher margin meaning higher earnings per share. Stocks higher, markets higher. Margin expansion is a big catalyst.
4. Data Centers as AI Factories: Data centres will be as AI factory. AI goal is to generate revenues, meaning creatation of intelligence.
5. Impact of AI Industry Leaders: AI with NVDA leadership will create new industries and possibilities for companies. Like AAPLE created IOS, App Store.
6. Development of AI CoPilots: Enterprises will leverage LLMs to develop AI "CoPilots" tailored to their specific needs.
7. Monetization of Data Assets: Companies with data (META;AMZN; MSFT etc) are sitting on a gold mine. Eventually will harness AI CoPilots to extract valuable insights and monetize data assets, unlocking new revenue streams.
8. Infrastructure: All major companies are building/equipping enormous data centers. Data centers require GPUs (Graphic Processing Units - NVIDIA). For the creation of AI, we need more chips, necessitating more chip factories. Data centers need hardware, software, cooling devices, roads, and construction. This represents investments for some companies and presents growth opportunities for others. For me, it signifies long term growth.
What companies will benefit FROM AI?
(It is not an investment advice. The following reflects my personal opinion, which may not align with current market conditions or reality.)
There are certain things we do not know yet at this stage. What companies investments will evenatually benefit for themselves, what new applications, industries (maybe robotics) companies will arise. This is ceratinly similar to internet boom, where we had hundreds of search engines and GOOGLE came out eventually the winner. At what scale will big companies investments into AI convert into earnings at this stage is hard to say. We can speculate on tremendous potential.
On the other hand, certain things are already evident. We know which companies are already benefiting. For us, the opportunity in chip stocks (such as NVDA, AMD, AVGO, LRCX, etc.) has largely played out. Nevertheless, we believe NVDA still has significant upside potential, while we are cautious about AMD's valuation compared to its peers. We are now focusing on the secondary wave of beneficiaries—specifically, infrastructure. We recently purchased Dell (DELL) and foresee it becoming the latest AI "Cinderella Story," with substantial upside potential. As data centers expand, Dell stands to benefit from increased orders related to AI, leading to sequential growth in its AI backlog over the coming years. We anticipate significant earnings growth and a rerating of Dell's shares, driven by both earnings growth and multiple expansion, representing a potentially double upside scenario.
In the EU market, we view SAP, Siemens (SIE:DE), and ALSTOM (ALO.PA) as the primary and ongoing beneficiaries of the first wave of AI adoption in the coming years. SAP and Siemens have close ties with Nvidia.
Industrial companies are poised to benefit from cyclical growth and productivity margin expansion. While industrial stocks have seen significant upside in 2024, they are not cheap relative to their peers. However, industrial cyclical growth is expected to continue.
In conclusion, we foresee upside for the US markets in 2024 and 2025 driven by the AI revolution and the resulting transformations across industries and markets.