Written by: Steve Clayton | Hargreaves Lansdown
- Artificial Intelligence – the emerging megatrend pushing efficiencies at a rapid rate and will turbocharge the digital economy.
- Net Zero - will drive a lot of investment but will offer challenges alongside opportunities.
- Politics - half the world’s population heads to the polling booths in 2024.
- HL Select’s view on the 2024 megatrends and how to prepare for them
Fund managers have to look ahead; the job forces one to project and analyse, then place the chips on the board, before the wheel has spun. We diversify to spread risk of course, but at its heart, fund management is about seeking rewards for taking measured risks with other people’s capital. That means trying to answer the big questions about where the world is headed and how it might impact upon businesses. At the moment, there seem to be some really big trends playing out.
Artificial Intelligence
Artificial Intelligence is an emerging megatrend and it will drive efficiencies at previously unimagined rates. Anyone who doubts that AI will change things should take a look at Nvidia. Nvidia make the chips that AI applications run on. In their latest quarterly earnings, release Nvidia reported revenues of $18bn an increase of $12bn against the same three months of the previous year. Analysts are forecasting that in just two years, Nvidia’s annual revenues will have grown by over $60bn.
If that much is being spent on the components that enable the technology to be deployed into real world uses, it seems fair to assume that quite a lot of change is intended to happen. There will be a few big winners, processor designers, hardware producers, datacentre operators and all that. But for me it is the potential for companies to up their returns by deploying the technology to cut through bottlenecks and lift service standards that is most exciting.
Whole new product categories are emerging. Microsoft’s Copilot costs $30 per month but reportedly can boost productivity by far, far more. Potentially we could see hundreds of millions of workers using copilots in the future. That could add up to a lot of GDP and a lot of revenue for Microsoft too. We have positions in Microsoft and Nvidia in the HL Select portfolios. We think these businesses are some of the core beneficiaries of the early stages of the surge in AI development.
Digital economy
AI has been stealing the limelight for good reason but it sits on top of other technologies, especially the internet. What AI will do is to turbocharge the power of the digital economy by making things smarter. In healthcare, AI can help to boost accuracy and output in areas like radiology by highlighting areas that need particular attention by the radiologist and speeding up the interpretation of scans.
Connecting sensor data gathered in the wards to AI engines will enable earlier interventions by medical teams. The possibilities are huge. Deploying AI into real-world situations will lead to more digital equipment, from sensors to servers being required. Digital businesses will be more capable and require more capacity as a result.
Cars will have more tech in them, they will be smarter and safer as a result. Aptiv is one of the largest manufacturers of core EV components and intelligent electronics for the new generations of automobiles set to benefit.
Net Zero
Net Zero is going to drive a lot of investment and there is enough legislation in place already in major economies to ensure that a lot of things are going to change. Power generation is decarbonising, which means new grids must be built. Total generation capacity needs to rise to allow electricity to displace fossil fuels from transport systems.
Minerals and metals to enable electrification will be needed in vast amounts. There are legitimate questions as to whether this is physically possible with the resources currently known to be in place. Battery technology needs to make some huge leaps before it can enable renewables to truly fulfil the central role that they must play in a decarbonised economy
Every industrial process, every day-to-day activity will need to be re-engineered to reduce energy intensity and material consumption even to get close to net zero. These are huge challenges but also huge opportunities. As carbon intensity falls, efficiencies will rise. Becoming more efficient was never a bad thing for business. Of course, there will be losers along the way. Carbon pricing will punish the inefficient and create competitive advantage for best of breed players in every sector. Setting the price of carbon globally is the single greatest challenge that legislators face if they are to make progress toward Net Zero. Insulating portfolios from carbon pricing is a core challenge for funds. Funds which focus on capital-lite, IP and technology-rich businesses mean they have below average carbon intensity, which should stand them in good stead.
Global politics - it’s the politicians that move, not the profits
Politics will also be grabbing the headlines to an unusual degree in 2024, simply because we have an unusually large number of elections. The UK has a general election pending, the US a Presidential one and so too do an extraordinary number of other democracies around the world. According to The Economist, over half the world’s population heads to the polling booths in 2024. Bu more often than not, it’s the politicians that move, not the profits.
Normally I think the impact of politics on commerce is overstated. Markets move around all the time in response to what one party says over here, or what another one does over there. Alas, the world appears to be entering a phase where nations have sharper elbows, whilst division and conflict are stepping into the spaces where unity and integration had flourished. I cannot see this trend as being positive for markets. But that is not to say there will not be winners. Re-shoring will boost growth in the western hemisphere and there will be winners worth backing along the way.
Staying ahead of the megatrends
Whichever trends grab the news, there are some things that I believe will remain constant. Cash flow is always critical to a company. Highly cash generative businesses should always form the bedrock of an equity portfolio. Leveraged companies are always riskier than those with cash in the bank, a point proven whenever recessions come around. Businesses with revenues that repeat, from products that clients can’t find elsewhere are a better bet than those that have to find all their customers afresh each day. Fill your portfolios with companies that fit those descriptions and you can spend less time fretting about what lies around the corner.
Related: 3 Funds To Watch for 2024