Equities have enjoyed a solid start to the month, with Big Tech companies driving the gains. Growing enthusiasm about artificial intelligence (AI) is one of the forces powering the surge in stocks of the trillion-dollar club, which comprises Apple, Microsoft, Alphabet and Amazon. (We have exposure to all of these stocks through our offshore house-view Funds.) These mega-cap stocks are driving the performance of the S&P 500 this year. According to Goldman Sachs, the weighted average returns of the six largest companies (including Nvidia and Tesla) was 44%, but the weighted average return of the remaining 494 companies was only 1% – leading to an overall return of 10% on the S&P 500 year-to-date.
Nvidia, which was momentarily one of the trillion-dollar club members, is one of the companies basking in AI exuberance. The company’s stock is up 163.5% for the year-to-date, fueled by the company’s role in providing the silicon chips that drive AI systems. Nvidia is now up 18% from its previous peak in November 2021, 232% from its low in October 2022, and around 487% from five years ago.
The tech-heavy Nasdaq composite is enjoying a banner year, even outperforming the Dow and S&P 500 indices. Yesterday, chipmaker Advanced Micro Devices Inc. rose 2.7%, while Adobe Inc. gained 5% on plans for a new AI subscription with copyright services.
There are clearly parallels between the early years of the internet and the current explosion in AI investment and innovation. True AI refers to making computers sense, comprehend, act, and learn with human-like levels of intelligence and a superhuman ability to process massive volumes of data. It represents a massive jump in capability over basic automation or earlier machine learning tech.
According to PwC, the AI Economy will grow to $15.7 trillion by 2030, representing a massive opportunity for investors. Some Big Techs will consolidate their positions, startups we’ve yet to hear of will build empires, and major organisations that fall behind the curve could see their business models become obsolete.
Just like the internet, we can expect to see AI drive massive gains in efficiency across nearly every industry. Asset management firms such as Dynasty may be able to use it to make smarter investment decisions, healthcare companies to rapidly test new drugs or diagnose illness, motor car companies to power autonomous vehicles, and insurance companies to hone underwriting and claims assessment processes.
Much like the internet, we are seeing different industries, companies and countries adopt AI at uneven paces. Those that are leading the pack are likely to get a significant advantage. We will see some dramatic stock movements in both directions as AI disrupts every sector—but when the dust settles, we can be sure it will change our world as profoundly as the internet.
“We see Generative AI as a fourth leg of a new market regime alongside ageing, deglobalisation and climate change”.
– Guy Monson, global chief strategist at Sarasin & Partners
“Steve Jobs once said that a computer is like a bicycle for the mind: It can help you to travel faster and farther. Artificial intelligence is the rocketship; it can take you to places you never imagined possible.”
– Derick David, tech writer and investor
Global News
- Tech stocks rose again yesterday, placing the S&P 500’s gain to over 20% since its low last October, placing this index in bull market territory according to a famous yet flawed definition.
- The global economy is forecasted to expand 2.7% this year, rising to 2.9% in 2024 according to the OECD’s latest Economic Outlook This listless outlook is due to the shocks of Covid and Russia’s war in Ukraine. Persistent inflation and the restrictive policies of major central banks seeking to contain price pressures are not helping. This means a tough situation for central banks as they must continue to react to core price pressures that are proving stronger than expected, while not overly hurting growth. Growth rates are below the 3.4% average in the seven years before the pandemic. The US, the euro area and China will see the same relative sluggishness in their recoveries.
- Former VP Mike Pence is set to challenge his former boss, Donald Trump, for the 2024 Republican presidential nomination. He has torn into the former president, accusing Trump of being unfaithful to the US constitution and of abandoning conservative values. Critics have queried whether Pence could succeed given his inability so far to win over hard-core Trump supporters and Republicans looking for an alternative.
- At the same time, Trump – who is campaigning to become president again next year – has been indicted over how he handled classified documents after he left the White House. He faces seven charges including unauthorised retention of classified files, US media reported. The charges are not yet public. This is the second indictment against him and the first ever federal indictment of a former president.
- Exports from China declined for the first time in three months in May, which adds to risks in the world’s second-largest economy as global demand weakens. The decline in international shipments, of 7.5%, was worse than the median forecast for a 1.8% drop. Exports to most destinations contracted, with double-digit declines to places including the US, Japan, Southeast Asia, France, and Italy. Imports declined 4.5%, better than an expected drop of 8%, leaving China with a trade surplus of $66 billion.
- Meanwhile, China is set to open up its $60 trillion financial market to foreign institutions, although it will continue to seek to prevent systemic risks. Growing tension between China and the US is frightening global investors. China has pledged to continue its financial opening, although authorities have recently cracked down on access to a broad swath of data and raided consulting firms. The US is considering further restrictions on investing in China.
- The eurozone is now in a technical recession as the economy shrunk for two quarters in a row. Eurostat revised down an earlier forecast that had predicted slight growth, after economic powerhouse Germany said last month, it had fallen into recession. The worse-than-expected figures come as inflation and higher interest rates have curbed demand in Europe’s largest economy. GDP shrank 0.1% in the first three months of the year.
- Pressure is being placed on UK energy suppliers to cut prices for thousands of struggling small businesses. Almost 100,000 businesses are at risk of going under after their long-term energy contracts were fixed when energy market prices reached a historical peak last year. French energy company EDF has agreed to offer new deals to 15,000 small and medium businesses that are trapped in long-term contracts.
- Tech company Apple has showcased its long-awaited mixed-reality headset, which comes after more than seven years of development and puts the company into a market that could someday transform computing. Called Apple Vision Pro, the device was introduced at Apple’s Worldwide Developers’ Conference in California. It is seen as a groundbreaking new product that can help the tech titan maintain sales. It marks Apple’s first major new category since the Apple Watch launched in 2015 and will attempt to redefine an industry in the same vein as the Mac, iPod, iPhone, and iPad.
- General Motors is set to follow Ford’s lead and adapt its electric vehicles to Tesla’s Superchargers, which essentially ensures the Superchargers will become an industry standard in the US. The news was broken on Twitter Spaces by GM Chief Executive Officer Mary Barra and Tesla CEO Elon Musk, GM EVs will gain access to 12,000 Superchargers. GM shares rose 3.8% in extended trading yesterday in New York. Tesla climbed 4.8% on the news. With the three largest US-based companies joining forces, it will put pressure on other companies to stop using the industry’s previous standard, called CCS, and build out their networks using Tesla’s system.
- Sources indicate that TikTok, the world’s most valuable start up, wants to more than quadruple the size of its global e-commerce business to as much as $20 billion in merchandise sales this year. It’s banking on rapid growth in Southeast Asia. This would represent a large increase from last year’s $4.4 billion in gross merchandise value, which represents the total worth of goods sold through its TikTok Shop offering. TikTok is betting on markets such as Indonesia, where influencers sell products from denim jeans to lipstick by showing them off in live-streamed videos. At the same time, it wants to expand sales in the US and Europe.
- Investec Bank has acquired a majority stake in European adviser Capitalmind Group, the latest deal for a boutique firm amid the worst mergers and acquisitions slump in a decade. It will increase its stake in Capitalmind to about 60% after having bought 30% about two years ago. Financial terms of the deal weren’t disclosed. Capitalmind employs more than 90 people and has seven offices in European countries including France, Germany, and the Netherlands.
- As at Thursday’s close the S&P was 0.3% up for the week.
Local News
- Business leaders met with Ramaphosa and his cabinet to discuss inclusive growth, inspire confidence in the economy and create jobs, the presidency said in a Twitter post. Government and business heads, such as Sasol, Sanlam, Sibanye and Anglo American have agreed to put together workstreams to tackle the country’s infrastructure challenges (including Eskom and Transnet) and rampant crime and corruption. This comes amid concern over the country’s energy crisis, logistic constraints and close ties with Russia grow.
- The country is focused on fixing its decrepit coal-fired power plants as well as a longer-term roll-out of at least 50 gigawatts of private renewable energy projects by the end of the decade with the aim of ending rolling blackouts. Repairs to Eskom’s two newest power stations — Medupi and Kusile — and the completion of maintenance at nuclear plant, Koeberg, are at the top of the list, which should mean less loadshedding towards the end of the year. Plans to retire some old coal-burning plants that are still performing well can also be delayed until the system has been stabilised, depending on the pace that private generation is added.
- An interministerial committee headed by deputy president Paul Mashatile has decided that the upcoming BRICS summit – which was to take place in Johannesburg in August – will be moved elsewhere, likely to China. This was the outcome of a meeting held on Monday and could remove the twin pressures of South Africa having to adhere to the International Criminal Court’s directive that it arrest Russian president Vladimir Putin should he land here, or face alienating an ally.
- Political commentator Roy Johnson has highlighted concerns about transparency, decision-making, and the economic and political challenges facing South Africa in the wake of the arms to Russia scandal and the ANC’s recent decisions.
- Reserve Bank governor Lesetja Kganyago has said that investors and lenders have a negative sentiment towards South Africa’s stance on Russia’s war against Ukraine, which has manifested in the sale of local bonds and shares by foreign investors. At the same time, the International Monetary Fund warned that the country is at risk of a recession this year if it goes backwards on economic reforms, or if global economic growth and financial stability are worse than expected. In the worst-case scenario, the economy could contract 1.8%, and unemployment move from 33% to 37%. It also stated, in its annual article IV report on South Africa, that South Africa should formalise its suggested 4.5% inflation target.
- South Africa narrowly escaped a technical recession in the first quarter of the year as GDP gained 0.1%. The economy avoided two consecutive quarters of negative growth, after an upwardly revised 1.1% decline in the previous three months to December 2022. Predictions are for minimal growth for 2023. However, the country could fare worse in the second three months of the year.
- The local current-account shortfall narrowed more than expected in the first quarter because the value of gold and merchandise exports increased. The deficit dropped to an annualised 1% of GDP value from a revised 2.3% from the previous quarter. The median estimate of 12 economists in a Bloomberg survey was for a gap of 2.8% of GDP. The current account is the broadest measure of trade in goods and services.
- Business confidence levels dropped for the fifth straight month to its lowest level since the height of the Covid-19 pandemic, largely because of the ongoing power crisis, which is adversely affecting companies’ profitability. The latest Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) business confidence index dropped nine points between the first and second quarters. Only about a quarter of respondents were satisfied with current business conditions.
- The rand strengthened below R19/$ for the first time in three weeks on Wednesday, because of a weakening dollar, an easing of rolling power cuts, and data showing that manufacturing output rose on an annual basis in April by 3.4% after declining 1.8% in March. The currency lost 7% in May amid record deep power cuts and US allegations that South Africa supplied arms to Russia last year, pushing the currency as low as R19.9075/$ last week and leading to fears it would breach R20/$. Mamokete Lijane, global markets strategist at Standard Bank CIB, believes that – despite the recent recovery in the rand – the worst is not over, even though current political and economic issues are priced into the currency.
- The South African Post Office could become the fourth state-owned enterprise (SOE) to be placed under business rescue in nearly four years. It is set to cut 7,000 jobs and sell noncore assets. As of 31 March 2023, it owed creditors R5 billion, which it cannot afford to pay back as it has been on a money-losing streak for 16 years. It was placed under provisional liquidation by creditor real estate company Withinshaw Properties towards the end of March. The hearing is set for 4 July. The Post Office could follow in the footsteps of other state enterprises including SAA, Mango Airlines and SA Express.
- Food company Bidcorp issued a trading update for the 10 months to end-April, causing its shares to decline as much as 6.1%, the most in 15 months, as it warned that low economic growth and persistent rolling blackouts hampered performance. However, the company reported growth in Australasia, the UK, and Europe.
- African Bank Holdings has posted an interim loss as retail customers came under pressure from the rising cost of living. African Bank Holdings was spun out from former parent African Bank Investments when that bank came close to collapse in 2014. It reported a net loss after tax of -R44 million for the half-year to March, compared with an interim profit of R372 million year-on-year as impairments in its consumer business soared.
- Standard Bank aims to ramp up its business offering for small businesses as new banking competitors, such as Capitec, African Bank and TymeBank, are targeting small-to medium-sized enterprises for growth. Standard Bank has about a quarter of the business and commercial banking segment, yet its share of the smaller enterprise segment is less than a fifth.
- As at the time of writing, the rand was 3.85% stronger and the ALSI was 0.2% down for the week.
Sources: Dynasty, BusinessLIVE, Bloomberg, IOL, FM, New York Times, TimesLIVE, The Guardian, Al Jazeera, CNN, Reuters, Moneyweb, etc.