Quarterly Equities and Multi Asset Outlook – Q3 2023

Quarterly Equities and Multi Asset Outlook – Q3 2023

20 min read 7 Aug 23

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Beyond Nvidia

  • We believe that AI and its applications have the potential to become a disruptive force in our personal and professional lives.
  • ‘Beyond Nvidia’, we have identified additional companies for which the market has yet to realise the potential impact and benefits of AI.
  • These companies extend across industries and geographies; from healthcare to infrastructure, from Japan to Latin America.
  • In exploring the areas where we see AI making a difference, we are not aiming to make stock recommendations based solely on AI. Rather, we are keen to provide our clients with examples of the possibilities that lie ahead.

Markets remain data driven and subject to shifts in sentiment. Central banks’ decisions are the main drivers of market moves. In our opinion, the timing and likely depth of a recession should be the focus in assessing risk assets’ performance ahead.  We are starting to see some stress at the edges in the form of rising bankruptcies in the US and earnings warnings in Europe. While there is still no sign of an imminent and pervasive collapse in global demand, with the rapid rise in interest rates, it is logical to expect further demand contraction from here. Given the lack of visibility on the demand outlook in the near term, with a wide range of possible positive-to-negative outcomes, we believe it is too early to throw in the towel on risk assets – as long as we stay high on the quality scale and remain selective. We still don’t believe that this is a time for taking directional macroeconomic bets (what we have previously referred to as ‘’broad-strokes investing’’). In our view, this continues to be a market in which it pays to be selective; and to differentiate between investing in broad market indices and active stock picking. In the wake of the outperformance of Nasdaq and S&P 500 indices, not many investors seem to have realised that only one US-listed stock has made it to the list of top 10 outperformers in the MSCI AC World Index (ACWI).

In our active selection, we continue to favour long-term structural themes: infrastructure, the low-carbon ecosystem, and innovation. When it comes to innovation, we believe that AI and its applications have the potential to become a disruptive force in our personal and professional lives. As we witnessed the skyrocketing performance of Nvidia and of a handful of other stocks in the first half of 2023, the M&G Equities and Multi Asset teams have identified additional companies for which the market has yet to realise the potential impact and benefits of AI, across industries and across geographies. As we were going through this exercise, and exploring all the areas where we see AI making a difference, now and in the future, we thought our clients would find it interesting to become part of the discussion. Hence the decision to dedicate our Q3 23 Outlook to this topic. 

The information provided should not be considered a recommendation to purchase or sell any particular security. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.

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Fabiana Fedeli,
Chief Investment Officer,
Equities, Multi Asset 
and Sustainability

Would you pass the outperformance quiz?

Markets remain data driven and subject to shifts in sentiment. Central banks’ decisions and any data that supports either hikes or cuts ahead remain the key drivers of market moves. However, in our opinion, given the extent of hikes and the odds of a ‘’higher for longer’’ environment, the timing and likely depth of a recession should be the focus in assessing risk assets’ performance ahead. 

While we have seen some weak macroeconomic readings across the globe, and some datapoints further weakening, others have remained resilient and there is still no sign of an imminent and pervasive collapse in global demand. However, with interest rates having risen so rapidly, it appears logical to expect a further contraction in demand. Some countries such as Germany have already experienced a mild technical recession. 

For now, both the timing and extent of a global recession remain difficult to predict. Markets are pricing in a mild outcome for the most part, with intermittent bouts of optimism and pessimism across both equity and fixed income markets. 

That said, we are starting to see some stress at the edges. Firstly, we are witnessing an increase in US bankruptcy filings. Secondly, especially in Europe, we have seen a number of earnings warnings – particularly in the materials and industrials sectors. While the number of negative versus positive warnings does not yet feel worse than usual, the reasons given by company managements for the earnings misses are concentrated in two areas: destocking and slowing corporate spending cycles.  

Given the lack of visibility on the demand outlook in the near term, with a wide range of possible positive-to-negative outcomes, we believe it is too early to throw in the towel on risk assets – as long as we stay high on the quality scale (whether in equities or credit) and remain selective. We still don’t believe that this is a time for taking directional macroeconomic bets (what we have previously referred to as ‘’broad-strokes investing’’). We continue to believe that this is a market for active investors, where selection is key. 

In the past, we have discussed finding attractive investment opportunities in markets that have been out of favour as a whole. For example, in our most recent 2023 Mid-Year Investment Perspectives we highlighted China as being one of those markets that, despite broader macroeconomic and geopolitical challenges, has offered some compelling idiosyncratic stock opportunities. 

This brings me to a fundamental distinction between the performance of equities and the perception thereof. We believe investors need to differentiate between investing in broad market indices and active stock picking. 

Many investors appear to believe that a small group of US stocks have outperformed global indices in the first half of 2023. Actually, they have not. It is true that the size of a few stocks, coupled with good performance, has moved the Nasdaq and the S&P 500 indices, allowing them to outperform other global equity indices. However, US stocks were NOT the best performers year to date. Of the best performing stocks in the MSCI AC World Index (ACWI) year to date, only one US-listed stock, Nvidia, is in the top 10 (Figure 1).

Figure 1: The best performing stocks in the MSCI ACWI year to date

  Security​ % Return Country​ Sector​ Market Cap. (USD BLN)​
1 Zhongji Innolight Co Ltd 421.1 CHINA Information Technology 15.7
2 CosmoAM&T Co Ltd 254.6 SOUTH KOREA Information Technology 4.4
3 Cambricon Technologies Corp Ltd 244.3 CHINA​ Information Technology 11.7
4 NVIDIA Corp 186.6 US Information Technology 1034.3
5 Kunlun Tech Co Ltd​ 185.7 CHINA​ Communication Services 6.7
6 Ecopro BM Co Ltd 169.0 SOUTH KOREA Industrials 18.2
7 Wistron Corp 168.2 TAIWAN​ Information Technology 7.3
8 Inspur Electronic Information Industry Co Ltd 150.8 CHINA Information Technology 10.3
9 Global Unichip Corp 143.4 TAIWAN Information Technology 6.7
10 Foxconn Industrial Internet Co Ltd 139.4 CHINA Information Technology 63.0
Source: Bloomberg, 27 June 2023. Currency: USD. The picture is similar in local currency, although the order varies. 

At a broader level, over the same period, 69 out of 100 of the top MSCI ACWI performers were outside of the US. In US dollar terms, the US takes the lead, while in local currency China has 31 of the top 100 performing stocks. 

Anecdotally, we have asked a number of audiences over the past few weeks if they could guess the composition of the top 10 list of MSCI ACWI outperformers year to date. Most believed that the majority of names were US listed. 

AI sleuthing

We have long maintained that for the long term we favour structural themes, those that would continue to see higher capital flows compared to the rest of the market even with a weaker macroeconomic backdrop. These are: infrastructure, the low-carbon ecosystem, and innovation. 

We clearly are not the only investors focused on innovation, judging from the strong recent performance of companies that are – rightly or wrongly – perceived to be benefiting from Artificial Intelligence (AI). 

The notoriety of ChatGPT and the rally experienced by Nvidia year to date (nearly tripling to breach the US$1 trillion in market cap mark) has greatly raised the profile of generative AI in the eyes of investors and the general public.

We believe that AI and its applications have the potential to become a disruptive force in our personal and professional lives. AI is not new. The first AI wave began roughly 10 years ago, with image recognition and predictive analytics as primary use cases. However, AI is now entering the next phase of its evolution driven by generative AI and large language models (LLMs). The new applications, as well as the improved user interface, are bound to catalyse the spread of AI technology. 

As we witnessed the skyrocketing performance of Nvidia and a handful of other stocks in the first half of 2023, the M&G Equities and Multi Asset teams have been identifying additional companies for which the market has yet to realise the potential impact and benefits of AI. In this, we are helped by having experienced colleagues with extensive expertise in investing in AI over the last decade.

Beyond Nvidia, across industries and markets

Our aim has been to look at AI across the board. Not only enablers – those companies that provide the technological building-blocks that make AI possible – but also service providers who can leverage AI to improve customer outcomes, as well as beneficiaries within and outside of the technology sector. Importantly, we looked beyond the US market.  

As we were going through this exercise, and exploring all areas where we see AI making a difference, now and in the future, we thought our clients would find it interesting to become part of the discussion. Hence the decision to dedicate our Q3 23 Outlook to this topic.

As an important disclaimer, we are not aiming to make stock recommendations based solely on AI. Not all of the stocks we mention are either owned in our investment strategies or considered timely investments. Rather, we wanted to provide our clients with examples of the possibilities that lie ahead.

For many companies, the potential gains in terms of efficiencies, productivity, and cost savings will likely take time to be realised, as we experience an ongoing reshaping of jobs and industries, and overcome multiple social, regulatory, safety and security obstacles. Some companies may find themselves not being able to keep up with more AI-savvy competitors, or may end up seeing the markets they operate in fall victim to AI’s many applications.

While Nvidia has seen an inflection in revenue related to generative AI, given the large amount of computational power that is required to run LLMs, there are a number of other companies and industries that will benefit from this AI movement – from software to semiconductor companies, to firms providing high-speed networking infrastructure (particularly for data centres and large cloud companies). We also believe IT services companies will help their clients deploy generative AI. 

Over time, we expect an increasing number of non-IT companies to benefit from applying AI to their operations. From healthcare to financial services to infrastructure, the number of use cases are increasing at a rapid pace. Importantly, businesses that have collected and own proprietary datasets stand a better chance of benefiting from AI, as they can employ technology to more effectively mine and utilise such data. 

As mentioned, the opportunities for AI use lie well beyond the borders of the US. For example, our discussions with Japanese companies thus far in 2023 have revealed a high level of awareness of, as well as investment in, AI – and generative AI in particular. 

Importantly, AI has the potential to change the geopolitical balance of power, with a number of emerging market countries potentially adapting to new technologies quicker than some developed countries. For example, AI developments and adoption are progressing rapidly in emerging Asia, with companies across Korea, India and China well positioned given their advanced technological know-how. The younger demographic profiles of India and Indonesia make them among the top countries globally contributing to traffic on the ChatGPT platform1

Elsewhere, in Latin America, financial firms have moved quickly to adopt ChatGPT and AI into their tech arsenal, often deploying on an experimental basis. Such firms are in a strong position to do so, given the vibrant fintech scene. Last but not least, the Middle East is leveraging its rich capital pool and is moving quickly to take advantage of AI opportunities.

As ever, the start of a new disruptive market force will create winners and losers. On a multi-year basis, we believe that the implementation of AI, and generative AI in particular, will be but one determinant of those winners and losers.

While we regularly test the robustness of our investment theses for companies held in our portfolios, in time, AI will likely require us to revisit the fundamental investment case for any given holding. In doing so, our priority will be to anticipate and move ahead of perceived risks, while at the same time identifying potential opportunities.

In the following tabs, you will find views from our Equities and Multi Asset Investment desks, looking beyond Nvidia, at what their respective markets offer or could offer when it comes to AI – whether it is from the point of view of the technology enablers, the service providers, or the early beneficiaries across a variety of sectors. 

We wish you an enjoyable and – hopefully – interesting read. 

1 https://www.similarweb.com/blog/insights/ai-news/chatgpt-openai-search-social/

The information provided should not be considered a recommendation to purchase or sell any particular security. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.

By M&G Equities and Multi Asset teams

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