Neil Birrell
Chief Investment Officer
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
In favour; AI
In the last two In favour / out of favour notes we have discussed the strong performance of a group of large US technology and communication companies, collectively known as the FAANGs, the valuation gap that has widened between them and the rest of the US stock market and our views on that. Their rise has latterly been driven by the new hot investment topic in town.
In the various discussions and debates that take place amongst the investment team over the past month, there has been one member who has been quizzed hardest and most frequently; that is Tom Globe, who manages the global ex-UK equity portfolios. There was one subject that was the topic of the conversations, therefore it is appropriate to let Tom do the talking here as well, the comments on AI below, are his words.
The buzzword for May was ‘AI’ with a seemingly never-ending stream of articles, headlines and conference calls dedicated to the subject. New levels of furor were reached with the release of NVIDIA’s earnings; a very strong quarter but more importantly revenue guidance that eclipsed consensus estimates – $11bn vs $7bn expected – with high demand for AI applications. This resulted in one of the largest single day moves in US stock market history and resulting in it being the first semiconductor company to cross the $1tr market cap mark. Interestingly though, the upgrades to revenues and earnings were greater than the share price move, meaning its valuation fell, even though the share price rose so far.
The share price moves were not limited to NVIDIA, with a rally sparked in the broader technology sector and particularly in anything considered to have direct or indirect exposure to AI. Companies were also quick to highlight their links to the relatively new technology with the number of times ‘AI’ was mentioned in results announcements and follow up calls with analysts, spiking. Unsurprisingly this did nothing to improve the concerns about market breadth as the mega cap technology companies saw large gains.
We have had consistently high weightings in the technology sector in the global equity portfolios of the four Diversified Growth funds. This has been difficult to achieve in the Diversified Income Fund, due to the requirement for income, and the Diversified Sustainable Growth Fund has had lower exposure.
Although we hold none of the FAANG stocks, we do have a reasonably broad spread of market leading companies that include NVIDIA, Broadcom, KLA and ASML. We consider these to hold strong positions in their respective markets and whilst there are commonalities in the underlying drivers of each stock, they sit at different stages of the supply chain. We also have positions in a number of smaller, more niche, players that are at an earlier stage of product penetration, but that we believe demonstrate similar attributes to their larger peers.
With recent market moves we felt that it was prudent to take profit in both NVIDIA and Broadcom. We continue to like the long-term proposition for both companies and continue to have positions. The small reductions were to manage risk and individual stock weighting within the funds and to bank some profits.
Whilst we are firm believers in the long-term prospects for the companies we hold, their exposure to AI and AI in general, we also retain an element of cautiousness. Whilst the needle has undoubtedly shifted in the demand and rollout of AI capability, we are aware that there is a degree of uncertainty in terms of timeline and actual revenue impact to some of the companies that have been vocal about it.
We will continue to actively manage the exposure to the technology sector, AI and the specific companies as markets and opportunities dictate and if the right opportunity presents itself, we will look to gain some exposure for the Diversified Sustainable Growth Fund.
Out of favour; sterling
It has been interesting watching sterling recently, although it hasn’t significantly moved one way or the other against any currency. As we see it, there is a likelihood of more interest rate increases in the UK, as inflation stays elevated, than elsewhere, particularly the US. Therefore, arguably, sterling should be bought. However, higher interest rates make it more likely that the UK enters recession, which would be negative for sterling.
Equally, all currencies are traded against counterparts; Dollar, Euro, Yen etc, so the prospects for them have equal importance in the exchange rates. I have previously written about the importance and influence of currencies on the returns from multi asset funds. For now, with the outlook for foreign exchange rates as uncertain as all other asset classes, we remain partially hedged in our non-sterling exposures. My hope is that, as we go through the peak in interest rates and inflation and the economic outlook becomes clearer, fundamentals will play a bigger part (again) in driving asset prices. That would aid active managers and provide great opportunity.
