US Equities: A Long-awaited Mean Reversion Seems Likely

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U.S. equities continued to rise in July, driven by a cooler-than-expected June CPI report that sparked a rotation from big tech and growth stocks to small-cap and value stocks. While it is too early to determine if this shift will be sustained, a long-awaited mean reversion seems likely, especially after the significant gains by the “Magnificent Seven” stocks over the course of the past 18 months.

Given the numerous factors influencing the stock market outlook, such as the upcoming U.S. election and interest rate changes, perhaps investors are starting to be mindful of the current market concentration. We have previously highlighted that just seven stocks account for nearly one-third of the S&P 500’s weighting and were responsible for over 50% of the index’s calendar year’s gains. Slower economic growth, a cooling labour market, and reduced consumer spending are potential factors that could increase market volatility, potentially benefiting investors who maintain a diversified portfolio.

On July 31, the Federal Reserve kept interest rates steady for the eighth consecutive meeting and have not yet indicated if a rate cut is anticipated to happen in the next meeting in September. Fed Chair Jerome Powell reiterated that the Fed will continue to reassess conditions meeting by meeting and that they are willing to hold rates steady as long as needed. On a positive note, inflation continues to cool and has made progress toward the Fed’s 2% target. The next FOMC meeting is scheduled for September 17-18. In July, the Russell 2000 Value significantly outperformed the S&P 500, yet still lags in year-to-date performance by over 500 bps. We anticipate a favourable environment for smaller companies as post-peak rates and necessary consolidation in certain industries such as media, energy and banking should lead to a more robust year.

 

Merger Arbitrage performance in July was bolstered by deals that closed, deals that made notable progress in receiving regulatory approvals, and a general firming of deal spreads following a period of heightened volatility. Amedisys (AMED-$98.05-NASDAQ), which agreed to be acquired by United Health for $101 cash per share, agreed to divest a package of care centers owned by Amedisys and UNH to home health operator Vital Caring in an effort to assuage the U.S. Department of Justice’s concerns about geographic overlap between the companies and shares reacted positively on optimism about the deal. Following a strategic review process, trade show operator Ascential plc (ASCL LN-£5.71-London) agreed to be acquired by Informa for £5.68 cash per share, with additional proceeds from a future asset sale. We crystallized gains on Westrock Co. (WRK-NYSE), Equitrans Midstream (ETRN-NYSE), Olink Holding AB (OLK-NASDAQ), Cerevel Therapeutics (CERE-NASDAQ) and Hibbett Inc. (HIBB-NASDAQ), among others. We remain optimistic about our ability to generate absolute returns going forward, and with first half M&A activity increasing 18% to $1.5 trillion, we expect to continue finding attractive investment opportunities.

In July the convertible securities market saw breadth expand, with a long overdue rotation out of mega cap tech into small cap. This trade was beneficial to many of the companies in the convertible market. While we believe there is room for this rotation to continue over a longer time horizon, we remain focused on companies with strong underlying fundamentals where we expect the convertible to provide asymmetrical exposure over time. Additionally, after months of postponed rate cut expectations, we are starting to see some data that suggests that easing financial conditions are imminent. This led to a bid in many holdings that would benefit from a lower rate environment, particularly in the Utilities sector, where we have been increasing our holdings.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

Global Polarization: The Hidden Face Behind Gold’s Record Highs

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Gold is now trading above $2,500 per ounce, showing signs of potentially breaking its historical highs again. Its value as a safe-haven asset shone brightly in the first weeks of August following the volatility shock experienced by the major equity markets, causing gold to rise after several downward sessions. Now that this “scare” has passed, what could continue to drive its valuation?

In the opinion of Charlotte Peuron, equity fund manager at Crédit Mutuel Asset Management, the increase in gold’s price to $2,400 per ounce has been driven by Western investors through gold ETF purchases and a more favorable financial environment for gold.

According to her outlook, given the downward trend of the dollar against other currencies and the real U.S. interest rates, the upward trend in gold is expected to continue.

“The upward trend in gold prices dates back to 2022. Three factors explain this movement: sustained demand for jewelry; investment in physical gold (coins and bars) by Asian investors; and massive purchases by central banks in emerging countries, particularly China, who wish to diversify their foreign exchange reserves and thus reduce their exposure to the U.S. dollar,” explains Peuron.

For James Luke, a commodities fund manager at Schroders, additional factors include changes in geopolitical and fiscal trends that are paving the way for sustained demand for gold, and gold miners might be poised for a significant recovery.

“Geopolitical and fiscal fragility—trends directly linked to demographic shifts and deglobalization, which, along with deglobalization, characterize the new investment paradigm that we at Schroders have dubbed the 3D Reset—combine today to forge a path toward a sustained and multifaceted global drive for gold supplies. In our view, this could trigger one of the strongest bull markets since President Nixon closed the gold window in November 1971, ending the U.S. dollar’s convertibility to gold,” he argues.

Towards a Polarized World

One of the most interesting reflections made by Luke is that the strength of gold reflects the shift towards a more polarized world. “The escalating tension between the United States and China, and the sanctions imposed on Russia following the invasion of Ukraine in 2022, have driven record gold purchases by central banks as a monetary reserve asset,” says the Schroders manager.

Currently, the $300 billion in frozen Russian reserve assets clearly demonstrate what the “weaponization” of the U.S. dollar—or in other words, the dollar’s hegemony—can truly mean. In his opinion, the massive issuance of U.S. Treasury bonds to finance endless deficits also raises questions about the sustainability of long-term debt. Furthermore, he notes that central banks—China, Singapore, and Poland, the largest in 2023—have been paying attention, although record purchases have only increased the share of gold in total reserves from 12.9% at the end of 2021 to 15.3% at the end of 2023.

“From a long-term perspective, central bank purchases clearly reflect the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007, Western central banks sold as much gold as they practically could, as after 1999 they were limited by gold agreements that central banks reached to maintain order in sales.

In that post-Berlin Wall and Soviet Union world, where U.S.-led liberal democracy was on the rise, globalization was accelerating, and U.S. debt indicators were quite quaint compared to today’s, the demonetization of gold as a reserve asset seemed entirely logical,” he explains.

However, he clarifies that the 2008 financial crisis, the introduction of quantitative easing, and emerging geopolitical tensions were enough to halt Western sales and quietly attract emerging market central banks to the gold market, averaging 400 tons annually between 2009 and 2021. According to Luke, “these are significant figures, less than 10% of annual demand, but not seismic.”

On the other hand, he warns that the more than 1,000 tons of gold—accounting for 20% of global demand—purchased by central banks in 2022 and 2023, a pace that continued in the first quarter of 2024, is potentially seismic. “It seems entirely plausible that the current tense dynamic between established and emerging powers, combined with the fiscal fragility looming not only over the reserve currency issued by the U.S. but over the entire developed economic bloc, could trigger a sustained move towards gold,” he argues.

In this context, and to put it bluntly, his main conclusion is that “the gold market is not large enough to absorb such a sustained move without prices rising significantly, especially if other global players also try to enter more or less at the same time.

Asset Managers Expand Their Offerings to Better Serve Large RIAs, According to Cerulli

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The independent and hybrid registered investment advisor (RIA) channels are growing at a faster pace than other brokerage channels. To capitalize on this opportunity, asset managers are expanding their coverage models and the depth of their resources for larger RIAs, according to the latest Cerulli Edge-U.S. Advisor Edition report.

The total number of independent and hybrid RIAs has surged in the past decade, rising from 18% to over 27%, and is expected to exceed 30% within the next five years.

Advisors with varying levels of experience and assets have made the switch, but RIAs with more than $1 billion in assets under management have experienced the greatest expansion.

With this growth, asset managers are enhancing their coverage models, expanding their service menus to better cater to these massive RIAs.

Currently, more than two-thirds of asset managers offer or plan to offer dedicated key account coverage, institutional pricing, and client-facing marketing materials to the largest RIAs.

At least 75% of asset managers are using or planning to use dedicated key account coverage to aid in distribution efforts with the largest RIA firms. However, these resources are no longer sufficient compared to the more complex resources advisors now expect from the industry.

“It is no longer a competitive advantage to simply provide key account coverage or make client-facing marketing materials more user-friendly,” says Kevin Lyons, senior analyst.

Advisors are seeking more intricate resources that can truly benefit their practice by making it more efficient, he added.

As a result, distribution executives at asset managers have also begun to focus on other services: nearly 70% currently offer or plan to offer portfolio construction/model construction services or investment analysis tools.

More than half (52%) offer or plan to offer business consulting resources (e.g., succession planning, growth strategies, team structuring).

“Wave after wave of advisors is joining the independent channel, coming from firms and channels that often provided portfolio analysis tools, consulting expertise, and investment analysis as part of their advisor affiliation. Asset managers understand the need to prioritize coverage in the RIA space and help fill any gaps in research or even administrative services that their former firms provided,” says Lyons.

As more experienced advisors migrate to independent and hybrid RIA channels, asset managers can seize the opportunity by deepening their competitive positioning through the quality of the resources they offer, making themselves more attractive potential partners for advisors, concludes the expert.

BlackTORO and SORO Wealth Announce a Strategic Alliance to Serve Mexican Clients

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EBW Capital and AIS Financial form strategic alliance
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BlackTORO Global Wealth Management and SORO Wealth announced this Wednesday a strategic alliance to jointly offer comprehensive investment and wealth management solutions to Mexican individuals and families.

SORO Wealth, based in Monterrey, “is defined by its excellence and innovation in providing wealth management advice to Mexican individuals and families, including corporate legal services, family governance definition, and legal advice on private equity and venture capital structures and transactions,” according to the statement accessed by Funds Society.

“This agreement marks an important step in our efforts to provide high-quality, value-added services to our clients in Latin America. The combination of our strengths will enable us to offer differentiated and long-term investment solutions to Mexican investors from the U.S.,” said Gabriel Ruiz, partner and president of BlackTORO.

BlackTORO has fiduciary responsibility and aims to provide independent, globally aligned investment advice that meets the high standards sought by Latin American individuals and families when investing their wealth. Their personalized services include investment portfolio advice and management and access to leading U.S. financial entities for custody and execution, with preferential conditions and costs, according to the firm’s statement.

The BlackTORO team has an “extensive track record in the financial industry, bringing essential experience and knowledge to the success of this strategic alliance,” the statement adds.

“This alliance will allow us to cross our borders and provide comprehensive and efficient wealth management services to our clients,” commented Mario Sosa, partner of SORO Wealth.

U.S. Increases Environmental Assistance in Latin America and the Caribbean

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Latin America and the Caribbean have seen a greater share of U.S. development assistance during Joe Biden’s administration, which has had a notable impact on the environmental sector, elevating it from third to second place in budget allocation, according to a BBVA report.

While the government and civil society sector has held the top spot for assistance to Latin America and the Caribbean under both Donald Trump and Joe Biden, environmental assistance has risen from third to second place in terms of the proportion of funding allocated during Biden’s administration.

Differences can also be seen between the Trump and Biden administrations regarding the purposes for which environmental assistance has been allocated.

Trump focused more on agricultural policy activities, rural development, and water, whereas Biden has placed greater emphasis on biodiversity.

For instance, environmental protection policies were dominant in both administrations, but this focus is more pronounced under Biden, who has allocated 59.4% of environmental assistance to this area, over 10 percentage points higher than his predecessor. Under Trump administration, environmental protection policies received 48.5% of environmental assistance, the bank adds.

Another noteworthy point is that during Trump’s presidency, agricultural policy and rural development (including activities such as promoting agroforestry systems and food security) had a larger share of environmental assistance, with 38.2% allocated to this purpose. Along with water and sanitation activities, which accounted for 8.9% of environmental aid, these two areas together comprised 47.1% of assistance in this sector.

Under Biden, the share of agricultural policy and rural development has decreased to 18.1% of environmental assistance. In contrast, funding for biodiversity, which was in fourth place under Trump, has risen to third place under Biden, accounting for 9.6% of environmental assistance. Multisectoral aid has also gained more importance under Biden, representing 6.6% of environmental assistance, while the proportion focused on water and sanitation has decreased from 8.9% under Trump to 4.1% under Biden.

Regarding the distribution by country in Latin America and the Caribbean, during Donald Trump’s administration, four countries accounted for two-thirds of the aid in this sector: Haiti (20.2%), Colombia (16.2%), Guatemala (14.3%), and Honduras (7.4%).

Under Biden, six countries now represent two-thirds of environmental assistance: Colombia, which has risen to first place with 17.6%; Guatemala, which has moved from third to second place with 11.6% of aid; Haiti, which has dropped from first under Trump to third under Biden with 11.5%; Honduras, which remains in fourth place with 10.2% of assistance in this sector; Brazil, which under Trump was in seventh place, now rises to fifth with 6.9%; and finally Mexico, which has moved from eighth place under the Republican administration to sixth, representing 6.4% of aid for the sector.

Overall, U.S. aid to the region is distributed as follows: 29.7% for Government and Society sectors, 18.6% for Environmental Assistance, 12.1% for Emergency Response, and 11% for Conflicts, Peace, and Security.

Countries Receiving the Most Aid Across All Sectors

Donald Trump provided the most assistance to Colombia, with 33.2% of aid received, followed by Haiti with 15.5%, and Mexico in third place with 10.4% of the total received. Hemispheric projects, those involving participation from Latin American and Caribbean countries along with counterparts in North America, accounted for 7.3%, while Peru ranked fifth with 5.9% of the assistance received.

Biden, on the other hand, has prioritized hemispheric projects in general, with 31.5% of aid provided so far by his government to the region. Colombia follows in the next position, with a 17.7% share, ahead of Haiti (9.6%), Guatemala (5.3%), and Honduras (4.7%).

Thus, Mexico has dropped from third place in aid received under Trump to sixth place during Biden’s administration, mainly due to increased focus on Central America, with Guatemala and Honduras in the current administration. Another point to highlight is the reduction in Colombia’s share, which under Trump represented 33.2% of the aid received in the region, while under Biden, it has almost halved to 17.7% of the total disbursed to Latin America and the Caribbean.

Investors Remain Optimistic, but Volatility Shock Leads them to Increase Cash in Portfolios

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Despite the market correction in early August, investor optimism has not been affected. According to BofA’s monthly manager survey, 76% continue to expect a soft landing and a Fed action, now, of four or more cuts to ensure that this expectation of a soft landing is met.

However, the survey picks up that global growth expectations in the August survey fell sharply by 20% compared to July, in fact a net 47% of respondents expect a weaker global economy in the next 12 months. “Growth expectations and risk appetite declined in recent weeks due to the yen volatility shock and weak July employment data,” notes the BofA survey.

As a result, investors increased cash levels again for the second consecutive month, rising from 4.1% to 4.3%. “Our broader measure of FMS sentiment, based on cash levels, equity allocation and economic growth expectations, fell to 3.7 from 5.0 last month,” the firm notes.

As for monetary policy, 55% of investors believe that globally it is too restrictive, the highest figure since October 2008. In this regard, they point out that investors’ belief that policymakers should ease quickly is driving expectations of lower rates, which is why 59% expect lower bond yields, the third highest figure on record (after November and December 2023). Bond yield expectations are also lower, a sentiment that has been increasing month-over-month.

Coupled with monetary policy expectations is the conviction that a “soft landing” of the economy will be achieved, a conviction driven by the likelihood of lower short-term interest rates. Specifically, 93% of FMS investors expect lower short-term rates 12 months from now, the highest figure in the past 24 years.

Asset Allocation

When it comes to talking about allocation within investors’ portfolios, the survey shows that in August investors rotated into bonds and out of the equity market. “The allocation to bonds increased to 8% overweight from 9% underweight. This is the highest allocation since December 2023 and the largest monthly increase since November 2023. In contrast, the allocation to equities fell by 11%, which is the lowest allocation since January 2024 and the largest monthly decline since September 2022. Notably, in absolute terms, 31% of FMS investors said they were overweight in equities, down from 51% who said so in July.

“In August, investors increased allocation to bonds, cash and health care and reduced allocation to equities, Japan, the Eurozone and materials. Investors are more overweight in healthcare, technology, equities and the U.S., and more underweight in REITs, consumer discretionary, materials and Japan. Relative to history, investors are long bonds, utilities and healthcare and are underweight REITs, cash, energy and the Eurozone,” BofA notes.

Finally, two curious tidbits of information left by this month’s survey is that the largest regional equity allocation was to the U.S., while the allocation to Japanese equities experienced the largest one-month drop since April 2016. “As a result, global managers’ allocation to U.S. equities relative to Japanese equities increased to the highest level since November 2021,” the survey concludes.

 

Appetite for Sustainable Funds Returned During the Second Quarter of the Year

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In the second quarter of 2024, the global universe of sustainable funds—which includes open-end funds and ETFs—received $4.3 billion in inflows, compared to the $2.9 billion in outflows experienced in the first quarter of the year. Does this mean that investors are returning to sustainable funds?

“The outlook for global ESG fund flows is starting to improve. We began the year with outflows, but this has since changed, with money returning to the sector. European ESG funds have gathered more than $20 billion so far this year. Across the pond, investor appetite for ESG funds remains moderate, with continued outflows, but these were smaller than those seen in the previous two quarters,” explains Hortense Bioy, Head of Sustainability Research at Morningstar Sustainalytics.

The report indicates that calculated as net flows in relation to total assets at the beginning of a period, the organic growth rate of the global sustainable fund universe was 0.14% in the second quarter, a slight improvement from the 0.01% rate in the previous quarter. “However, the aggregate growth of sustainable funds lagged behind the broader fund universe, which with $200 billion in inflows, recorded an organic growth rate of 0.4%,” the report notes.

To put this in context, the Morningstar Global Markets Index achieved a 2.6% gain in the second quarter, while fixed-income markets, represented by the Morningstar Global Core Bond Index, fell 1.2%. “Europe represents 84% of global sustainable fund assets, and the United States maintained its status as the second-largest market. With total assets of $336 billion, it held 11% of global sustainable fund assets, reflecting the distribution observed three months ago,” the report states.

Specifically, European sustainable funds raised $11.8 billion, compared to the $8.4 billion recorded in the previous quarter. The report also noted a reduction in outflows in Japan, while sustainable funds in Asia continued to attract new net money.

Lastly, it highlights that product development continued on a downward trajectory, with only 77 new sustainable fund launches in the second quarter of 2024, “confirming the normalization of sustainable product development activity after three years of high growth during which asset managers rushed to build their sustainable fund ranges to meet the growing demand from investors,” the report indicates.

Zest and XP Launch Their First Joint Investment Committee

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Asset managers now know how to navigate their way into the portfolios of Zest and XP, the strategic alliance between two brands aiming to conquer the Latin American Wealth Management client segment. The two firms held their first Investment Committee meeting on Monday, August 12.

According to a statement sent to Funds Society, “the purpose of the Committee is to analyze the global economy to define an investment thesis in line with current conditions. This investment thesis is expressed in model portfolios, according to the different risk profiles defined by the Committee’s policy.”

Jonathan Kleinberg, Asset Management Manager at Zest, emphasized the importance of this alliance and the added value it brings to the analysis and decision-making process.

“This committee is fundamental to our alliance with XP. Incorporating diverse perspectives and knowledge on the global economic situation is crucial to recommending the best positioning to our clients, always aligned with their investment objectives and risk profiles,” Kleinberg stated.

Together, the combined Zest and XP teams have 50 analysts focusing on global trends and the situation in Latin America. The committee meets quarterly and monitors investment theses with a focus on wealth preservation.

During the inaugural Committee meeting, the current and future dynamics of the U.S. monetary situation were analyzed, a crucial factor influencing global markets and, consequently, the economies of Latin America.

It was highlighted during the meeting that, following a very strong economic cycle in the U.S., characterized by a rapid increase in prices, the economy has begun to slow down. The risks of a potential recession have increased, although if it materializes, it is expected to be mild and allow for a subsequent recovery. The Federal Reserve could begin a cycle of rate cuts starting in September, with a possible aggressive decrease of 50 basis points, followed by more cuts in November.

Alberto Bernal, Chief Global Strategist at XP, clarified that “although the slowdown is evident, we do not see structural signs suggesting a deep recession. We expect the Federal Reserve’s monetary policy to act as a necessary relief for the U.S. economy, which will directly impact Latin American markets.”

Zest powered by XP is a financial services platform that provides access to international capital markets. It currently manages over 5,000 clients and 80 financial advisors. The group’s business focus is on financial education and high-tech solutions.

XP Inc. comprises one of Brazil’s largest investment platforms, with a presence in major financial centers around the world. XP owns brands such as XP, Rico, Clear, XP Educação, InfoMoney, among others. XP Inc. has 4.6 million active clients and more than 200 billion dollars in assets under custody. For 23 years, the group has been transforming the Brazilian financial market to improve people’s lives. A pioneer in the market with its network of investment advisors, which is now the largest in the country, with more than 14,000 professionals. For more information, visit the website.

Janus Henderson Announces Acquisition of Victory Park Capital

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EBW Capital and AIS Financial form strategic alliance

Janus Henderson Group announced that it has entered into a definitive agreement to acquire a majority stake in Victory Park Capital Advisors, a global private credit manager.

With a nearly two decade-long track record of providing customized private credit solutions to both established and emerging businesses, “VPC complements Janus Henderson’s highly successful securitized credit franchise and expertise in public asset-backed securitized markets, and further expands the Company’s capabilities into the private markets for its clients”, the statement said.

VPC invests across industries, geographies, and asset classes on behalf of its long-standing institutional client base. VPC has specialized in asset-backed lending since 2010, including in small business and consumer finance, financial and hard assets, and real estate credit. Its suite of investment capabilities also includes legal finance and custom investment sourcing and management for insurance companies.

In addition, the firm offers comprehensive structured financing and capital markets solutions through its affiliate platform, Triumph Capital Markets. Since inception, VPC has invested approximately $10.3 billion across over 220 investments , and has assets under management of approximately $6.0 billion, according the firm information.

Janus Henderson expects that VPC will complement and build upon Janus Henderson’s $36.3 billion in securitized assets under management globally, the press release adds.

“As we continue to execute on our client-led strategic vision, we are pleased to expand Janus Henderson’s private credit capabilities further with Victory Park Capital. Asset-backed lending has emerged as a significant market opportunity within private credit, as clients increasingly look to diversify their private credit exposure beyond only direct lending. VPC’s investment capabilities in private credit and deep expertise in insurance align with the growing needs of our clients, further our strategic objective to diversify where we have the right, and amplify our existing strengths in securitized finance. We believe this acquisition will enable us to continue to deliver for our clients, employees, and shareholders,” said Ali Dibadj, Chief Executive Officer of Janus Henderson.

This acquisition marks another milestone in Janus Henderson’s client-led expansion of its private credit capabilities following the Company’s recent announcement that it will acquire the National Bank of Kuwait’s emerging markets private investments team, NBK Capital Partners, which is expected to close later this year, the firm says.

“We are excited to partner with Janus Henderson in VPC’s next phase of growth. This partnership is a testament to the strength of our established brand in private credit and differentiated expertise, and we believe it will enable us to scale faster, diversify our product offering, expand our distribution and geographic reach, and bolster our proprietary origination channels,” said Richard Levy, Chief Executive Officer, Chief Investment Officer, and Founder of VPC.

The acquisition consideration comprises a mix of cash and shares of Janus Henderson common stock and is expected to be neutral-to-accretive to earnings per share in 2025 and is expected to close in the fourth quarter of 2024 and is subject to customary closing conditions, including regulatory approvals.

The next phase of the AI journey will be driven by broader adoption of generative AI

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Artificial Intelligence made headlines in 2023, but where is it headed now? ChatGPT and other generative AI tools have directly benefited a handful of stocks so far. According to Allianz GI, the next wave of AI advancements should expand opportunities to other companies within the ecosystem.

“This initial buildout of AI infrastructure lays the critical foundation for further disruptions as companies across various sectors leverage generative AI capabilities,” they argue.

According to Allianz GI’s latest report, the next phase of generative AI adoption and growth should benefit a broader ecosystem, including AI applications and AI-enabled industries in the coming years. “We are still in the early stages of AI infrastructure buildout and generative AI adoption. Unlike previous innovation cycles, where agile startups disrupted larger incumbents, this time, tech giants have been the initial beneficiaries. These tech giants have more resources, unique data sources, and significant infrastructure capabilities to train large language models (LLMs) and seize early opportunities with generative AI,” the manager notes.

So far, they believe that much of the outperformance in stocks has been concentrated in a select group of AI infrastructure and tech giant companies in this initial phase. Specifically, a handful of semiconductor companies whose accelerated computing chips are crucial for AI training, and major hyperscale internet and cloud providers who quickly leveraged generative AI and showed some early monetization.

“Continued developments in generative AI and large language models (LLMs) have driven much stronger demand for AI infrastructure so far, causing some supply constraints as hyperscale cloud platforms invest heavily to meet the rising demand from corporations and governments worldwide. Demand is expanding into other areas like next-generation networks, storage, and data center energy infrastructure to support the explosive growth of new AI workloads,” the report comments.

Allianz GI also observes a new wave of AI applications incorporating generative AI capabilities into their software to drive more value and automation opportunities. “Many companies in AI-enabled industries are also increasing investments in generative AI to train their own industry-specific models on proprietary data or insights to better compete and innovate in the future,” they state.

However, they warn that many of these new AI use cases are still in the pilot development phase and are not yet monetizing or contributing to earnings. They explain that, along with higher interest rates for a longer period in 2024, there has been greater dispersion in stock performance between infrastructure, software/applications, and other sectors so far this year. The market is taking a wait-and-see approach to valuing the benefits of generative AI in the broader ecosystem at this time. Allianz GI expects more clarity on the impact in the coming year as new applications and use cases emerge with each generation of better AI chips and as these AI models become smarter.

“In general, the AI innovation cycle is just beginning. The initial buildout of AI infrastructure sets the stage for more companies across various industries to leverage generative AI capabilities and catalyze the next phase of adoption and growth. In this next phase of disruption and change, there will be significant opportunities to generate alpha through active stock selection in AI applications and AI-enabled industries,” they conclude.