Artificial intelligence (AI) isn’t new—the technology sector has been working on it for many years and many of us interact with AI-powered virtual assistants and chatbots like Siri or Alexa every day. But this year, we’re seeing the potential of AI become real as big tech companies and startups race to position themselves at the forefront of the digital economy’s next boom sector.
There’s a massive wave of innovation breaking in the market, powered by the rapid maturing of generative AI tools like ChatGPT, which make the likes of Siri look basic. This technology can generate text, images, video, or other media in response to end-user prompts. ChatGPT reached 100 million users just two months after launch, making it the fastest growing consumer internet app we’ve seen to date.
While we’re careful about getting too caught up in the hype, the current AI revolution is starting to resemble the excitement we saw with the rise of Web 2.0 players like Facebook, Uber, Netflix, and Twitter a decade and a half ago. OpenAI, the startup behind ChatGPT, was valued at around $30 billion in its latest funding round.
Microsoft’s investment into the firm is one reason that analysts and investors are bullish about its stock. Credit Suisse analysts predicts Microsoft could gain $40 billion in revenue and $2 in earnings per share over the next five-plus years as it integrates ChatGPT deeper into products such as Bing, Office, and the Azure cloud platform.
Microsoft’s rivals like Amazon, Alphabet, Apple, and Meta are also pouring money into the AI space. In their most recent earnings call, Alphabet mentioned AI 50 times, followed by Meta with 49 times and Microsoft with 46 times. As these tech titans invest in AI, it may also be positive for chip manufacturers such as Nvidia and AMD.
But the story that will be truly fascinating is how AI disrupts the wider economy. In what could be a harbinger of things to come for industries such as finance and telecoms, IBM is looking to pause hiring for back-office jobs that it thinks machines could handle. Online education company Chegg is reporting a hit to its revenues due to AI, which should send shivers down the spine of other education and media firms.
In fact, the World Economic Forum’s new Future of Jobs report predicts that AI and other economic drivers will result in 83 million job losses over the next five years, but the creation of 69 million new jobs. The next few years will certainly be interesting to watch, but as always, we believe that companies with good leadership will be able to navigate the inevitable disruption that change brings.
“We’re making this analogy that AI is the new electricity. Electricity transformed industries: agriculture, transportation, communication, manufacturing.”
– Andrew Ng, Computer scientist.
“Automation is no longer just a problem for those working in manufacturing. Physical labor was replaced by robots; mental labor is going to be replaced by AI and software.”
– Andrew Yang ,US entrepreneur and politician.
“Some people call this artificial intelligence, but the reality is this technology will enhance us. So instead of artificial intelligence, I think we’ll augment our intelligence.”
– Ginni Rometty, Former Chairman and CEO of IBM
Global News
- IBM’s CEO, Arvind Krishna, has stated that the tech company expects to pause hiring for roles it thinks could be replaced with artificial intelligence in the coming years. Hiring in back-office functions — such as human resources — will be suspended or slowed. These non-customer-facing roles amount to roughly 26,000 workers. He anticipates 30% of that getting replaced by AI and automation over a five-year period. That would mean roughly 7,800 jobs lost. Part of any reduction would include not replacing roles vacated by attrition.
- American education tech company, Chegg, saw its shares drop 42% on Tuesday after warning that the ChatGPT tool threatens growth of its homework-help services. This is one of the most notable market reactions yet to signs that generative AI is upending industries. Chegg makes much of its money from subscriptions, which start at $15.95 a month, a revenue source that’s in peril if students see AI chatbots as an alternative to paying. Fourth quarter earnings dropped to $1.9 million from $ 207.5 million a year ago.
- The Fed pushed interest rates up by 0.25% on Wednesday and indicated this may be the final move in its most aggressive tightening campaign since the 1980s. The increase lifted the Fed’s benchmark federal funds rate to a target range of 5% to 5.25%, the highest level since 2007, up from nearly zero early last year. Equity markets had anticipated this move, and hence market reaction to the announcement was fairly muted.
- The Fed’s future direction will no doubt be influenced by data over the next few months. The consensus expectation is for inflation to head below 3% in early 2024. As a result, many economists believe the Fed would have the space to start cutting rates in the first half of next year, having kept rates on hold for about 12 months. In contrast, however, is that the interest rate curve is still pricing in at least one cut of 25 bps later this year and as many as four cuts within the next twelve months.
- On Monday, regulators seized control of First Republic Bank and sold it to JPMorgan Chase, seeking to curb a two-month banking crisis that has rattled the financial system. It is the second-largest US bank by assets to fail after Washington Mutual, which collapsed in 2008 and was also acquired by JPMorgan. First Republic’s collapse has been blamed on jumbo mortgages, as it had a strategy of lending large amounts of money to wealthy individuals at low interest rates.
- Another unsettling round of trading halts in the financial industry hit Western Alliance Bancorp and PacWest Bancorp, this time amid losses that topped 60% for each stock. The rout engulfed several other lenders — big and small — with First Horizon down over 30% after its merger with Toronto-Dominion Bank was scrapped. A probe into Goldman Sachs Group’s role in Silicon Valley Bank’s deal also weighed on sentiment.
- Treasury Secretary Janet Yellen has warned US legislators that it will soon be impossible to use special accounting maneuvers to stay within the federal debt limit by June. The US hit the current statutory limit of $31.4 trillion in January. Yellen’s new timeline of June reflects the department’s latest thinking on when that headroom is likely to be exhausted. Democrats are trying to force a debt-limit increase bill to the floor that could bypass Republican leaders who have refused to raise the ceiling unless President Joe Biden agrees to spending cuts and policy changes. Top congressional leaders will meet on 9 May to discuss the issue.
- There is a growing pessimism in the world of active investing, despite a rally that has added $5 trillion in equity values since the market’s October 2022 low. Professional stock pickers are increasingly moving cash out of economically sensitive shares such as banks in favour of those stocks that are seen as more resilient such as utilities and consumer staples. It is interesting that this development is aligned with Dynasty’s investment philosophy, which favours sectors such as consumer staples and medical suppliers and is completely absent from banks and other cyclical sectors like commodities.
- China is fighting back against the US’s influence over being the global money standard, striking deals that will see its own currency, the yuan, used in more countries. There are now new agreements linked to the renminbi stretching from Russia and Saudi Arabia to Brazil and even France. These moves are helping China to carve out a bigger place for itself in the international financial system. They come at a time when geopolitical strains are growing, and global commerce is becoming an ever-more-active battleground. The US and China are seemingly at war over issues ranging from trade and Taiwan to TikTok and technological know-how. Hard-hitting sanctions on Russia have revealed a new willingness by the US to weaponize the dollar. Taken together, that’s done more to promote China’s yuan over the past year than Xi’s government achieved in the preceding decade.
- The European Central Bank hiked rates 25bps as inflation in the Euro zone gained in April, jumping 7% in April from a year earlier. While inflation has slowed sharply from double-digit readings late last year, it is still too high. Core inflation, which excludes food and energy prices, decreased slightly to 5.6%. While the data should slow rate hikes, it has indicated that there will be more yet to come.
- Morgan Stanley is set to cut 3,000 jobs as it focuses on slashing expenses as recession fears delay a rebound in dealmaking. According to sources, these jobs will be eliminated by the end of June, and amount to about 5% of staff, excluding financial advisers and personnel supporting them within the wealth management division. The cuts come just months after the firm trimmed about 2% of its workforce.
- Apple’s rebound in sales of the iPhone suggests that the tech company is beginning to recover from a slump that’s tormented both the computer and smartphone industries. Overall revenue amounted to $94.8 billion in the second quarter. Analysts had expected $92.6 billion in revenue. Sales fell 2.5% in the period, lower than Apple’s warning of a drop of about twice that.
- Alibaba’s rally, which followed the announcement that it would split into six units, has faded. Its American Depositary Receipts are now 2.3% below where they were before it announced its overhaul plan last month. This has wiped out as much as 20% in gains after investors had hoped that the split would boost the e-commerce empire’s value and increase chances of listing those units publicly. However, US-China geopolitical tensions are flaring, and some are starting to backtrack on their earlier enthusiasm.
- As at Thursday’s close the S&P was 2.6% down for the week, however the positive employment numbers released in the US on Friday have led to an intraday recovery of 1.5%.
Local News
- The major news for the week is the sweeping changes to the Tax Clearance Process as introduced by National Treasury. The changes in processes and the information required to remit funds abroad have major implications for both residents and non-residents. Given its relevance to Dynasty clients, we commissioned our tax specialist, Robyn Rogers, to compile an article outlining the implications of this legislation, which has come into force with immediate effect. The article may be accessed here.
- South African politicians from both the ruling party and the official opposition are in Washington with the aim of stopping South Africa from being excluded from the Africa Growth and Opportunity Act. This comes amid rising concerns about Pretoria’s deteriorating relations with Washington over what the US and other Western governments see as the ANC government’s increasingly friendly relations with Moscow. The immediate concern in Pretoria is that the US could end or reduce South Africa’s participation in the Act, which gives duty and quota-free access for most South African exports to the US. This would hamper the country’s ability to balance the import-export books and harm the economy.
- Political commentator Justice Malala has written a scathing article , saying that Ramaphosa has frittered away five precious years in policy incoherence, indecision, incompetence, and elements of the corruption he vowed to eradicate. “Ramaphosa not only fails to lead, he cannot even choose a policy line, articulate it and implement it. He says an immoral and unethical thing one minute and is contradicted by his own party the next. Eager to please dictators and democrats at the same time, he ends up pleasing no-one while attracting the scorn of all.”
- Meanwhile, Minister of Public Enterprises, Pravin Gordhan, is hoping to resolve a stalemate over the delivery of locomotives and spare parts by Chinese rail equipment manufacturer CRRC E-Loco to the state rail utility. He is leading a delegation that will meet counterparts in the Chinese government. The trip is part of an effort to fast-track the supply of the goods to state-owned company Transnet. The impasse started when Transnet halted the supply of 1,064 locomotives on the grounds that the R54 billion deal had been irregularity awarded. However, its current CRRC locomotives urgently need maintenance by CRRC. Out of action trains mean that Transnet is losing about half of its freight rail revenue, while material from coal, chrome, and manganese mines cannot be transported.
- After Shoprite said that it would need to spend billions to keep the lights on in the face of ongoing rolling blackouts, Pick n Pay has become the latest casualty to need to spend a fortune on energy supplementation. The retailer will spend an additional R1 billion on diesel next year, double that of last year. At the same time, the retailer – South Africa’s third-largest grocer by revenue – warned that the entire food industry is under existential threat, with a high likelihood of social unrest relating to food shortages and possible store closures if blackouts are escalated.
- One of South Africa’s largest suppliers of chicken, Astral Foods, expects a plunge in profits for its half-year results as record high feed input costs, the electricity crisis, and the decay of municipal infrastructure drives up costs and hampers the poultry group’s operations. It expects its headline earnings per share to drop 87%-92% year-on-year to 116c-189c and 114-185c, respectively, for the six months to end-March.
- The gold price gained more than 3.5% on Tuesday as it broke through the $2,000/ounce level for the sixth time this year, leading to a weekly gain of 2.6% and a gain of 11.9% for 2023. While the gold price performance has quite closely resembled that of global equities over the last year, the move this past week was negatively correlated and may lead to further gains, if the technical analysis is to be believed. We do have a small allocation to gold via an ETF in our local Dynasty Ci Wealth Preserver Fund, which we hold as a rand hedge, as well as in terms of a diversification and risk management strategy.
- As at the time of writing, the rand was 0.8% weaker for the week while the ALSI was down 0.2%
Sources: Dynasty, Bloomberg, Reuters, Daily Maverick, BusinessLIVE, Sunday Times, News24, AFP, Euro News, The Conversation, Analytics Consulting FX Solutions, CNBC, TechCrunch, Yahoo, Venturebeat, Weforum, etc.
