Investment funds that participated in the US mega-cap tech boom of the previous year are not lowering their high hopes for the development of artificial intelligence.
A large amount of the S&P 500’s 24% return in 2023 was driven by the so-called Magnificent Seven:Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
The introduction of consumer-facing AI early in the year helped boost stock prices and the earnings forecast for tech giants likeMicrosoft, Alphabet, and chipmaker and AI darlingNvidia, whose stock has climbed more than 230% in the last 12 months.
This rally has continued into 2024, with the Magnificent Seven’s combined 15% gain in January responsible for a large portion of the S&P 500’s 5.8% year-to-date gain.
One of the biggest winners from the AI boom was the Brisbane fund managerHyperion, which outperformed most other Australian fund managers in 2023 with a return of 69%. The fund’s difficult 2022 was all but reported by the performance, which saw a collapse of over 40% combined with a collapse in international tech equities.
Hyperion’sinvestment expertJolon Knightstated during a presentation at a Pinnacle Insights event in Sydney that the fund was still optimistic about the industry.
Similar to what happened with the internet, smartphones, and cloud computing, we believe that AI and [machine learning] are genuine and that we may be on the verge of a paradigm change that will present a once-in-a-generation chance to raise equity values. It will take more than a year or two to resolve.
Additionally,Mr. Knightstated that Hyperion’s longer-term earnings projections for a few of its owned businesses differed markedly from those of the market.
SPEED UP
According to him, “We truly adopt a longer-term investing strategy than the market and attempt to take advantage of time arbitrage. It means that should we prove true and our firms do well, you will have a massive earnings upgrade cycle, which will likely result in a sharp increase in share prices.”
Mr Knight stated that following the US earnings season in January, there were indications of additional buoyancy from the businesses they hold shortly.
He stated that the major IT companies reduced staff and expenses in the previous year. This year’s results have demonstrated this, and it will only become more evident.
At the same event,Vihari Ross, the portfolio manager at Antipodes, reiterated Hyperion’s optimistic assessment of AI, referring to her company’s investment in Taiwan Semiconductor Manufacturing Company as “the pick and shovel play of the AI revolution”.
Many investors were taken aback by the surge in AI stocks last year. A recent analysis from asset consulting firmFinancenoted that active managers had found it challenging to create value in the absence of holding the well-known US mega-caps.
Investors can learn some fascinating lessons from asset manager performance till the end of 2023. The research pointed out that many equities managers were finding it difficult to control the out-of-control Magnificent Seven.
It did, however, signify a remarkable year of rapid expansion, with an average 13.1% excess return over 2023, as well as strong but more restrained increases in growth and quality growth.
The head of long-short strategies at Plato Investment Management, which owns Microsoft stock,David Allen, observed that the previous year’s surge had evaporated in the face of the industry’s more challenging forecast for 2023.
Upcoming OZEMPIC
According toDavid Allen, the general belief at the beginning of 2023 was that low-interest rates would skyrocket and tech valuations would dive. In actuality, the Magnificent Seven achieved an astounding 90% return on their investments over the year.
He said that Microsoft’s Copilot product represented a possible AI-driven advantage for the software industry leader. Although Microsoft is arguably at the forefront of AI, many perceive it as the internet’s first-generation platform.
Away from technology, the Plato fund manager mentioned how, in 2023, investors were drawn to pharmaceutical businesses likeNovo Nordiskdue to the emergence of Ozempic-style weight-loss medications.
These amazing medications for weight loss are now well-known to the general public. We still possess Novo Nordisk, a brand we have had for two years. However, their prices are somewhat high.
He called Vertex Pharmaceuticals, a company traded on the Nasdaq, “the next Ozempic” of pain management. In place of opioid-based medications, the business is creating acute pain medication.
According toDr. Allen, there is an urgent need for an opioid substitute in the world. It has resembled a pharmaceutical company graveyard. Many have attempted to address this issue and discovered a completely non-addictive medication that is just as successful as opioids. Vertex appears to be very close.
