Opinions Jamie Murray A Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 25, 2023
Jamie Murray You might be interested:
Big news came out over the weekend that's affecting stocks this week. Initial reaction was that people were scared that AI development is not going to continue, and companies won't continue investing and innovating into the frontier models.
Those concerns are misplaced. What's going to happen is that we're going to be a lot more careful when introducing these models in order for them to be secure and safe for the public. There will be a little more investment in cybersecurity, and a bit more review before models come to market. But, ultimately, it won't affect the pace of development.
The key will be to come up with a pre-agreed standard that companies apply and screen for. Not sure it needs to be regulatory oversight.
Doesn't see any sort of slowdown in development, especially in hardware investments. Over the past year, dollars have shifted from the big data centres and more toward distributive architecture. We've gone from a model-training era to an agentic era. The big dollars are being spent on inference and using these AI systems. That will continue.
Even if there are regulatory changes on the model side, the application and adoption side are still in very early innings. That's where she's looking for opportunities.
Doesn't own any at the moment. Reason is because her firm tries to generate alpha, and they usually find it in companies that are between $10-100B in market cap. But her team follows them closely because they set the tone for the rest of the infrastructure spend.
If you look at the 3 biggest hyperscalers today, the best position is probably in GOOG. Doing lots of internal development and investment in its AI models. Gemini is lagging Anthropic and OpenAI, but it's a close third. GOOG is really at the forefront of innovation, especially compared to the other 2 hyperscalers.
AMZN is well-positioned because of its partnership with Anthropic. In third place is MSFT, which really hasn't come up with a differentiated strategy.
She does invest from time to time, but not now. Level of improvement seeing to date is not meeting the expectations that people had 2 years ago. The downside surprise was that the working quantum computer of today doesn't outperform accelerated computing. Commercial adoption is not there yet. Need to have a really long-term horizon, about 10 years out for broad deployment.
As soon as we have some sort of indication that a computer performs on par, or better than, accelerated computing, that's where you want to invest. You don't necessarily have to wait 10 years.
Lots of risk, as many of the publicly traded stocks may not be the ones that end up winning. One to put on your radar.
He's not bullish yet. Since early summer, he has moved from neutral to high risk, when there's more market volatility. The S&P is below 7,600; if it stays here, it becomes technical support, and likely fall to 7,300. The crowd is getting very bearish because they've seen the market fall for the past month. He predicts a little more downside before we reach capitulation, which is the time he will buy. We're getting there. He still holds 20% cash, and is ready to deploy it.
Canada needs to look internationally to raise capital to finance the country's massive build-out. Need to offer a significant premium to money-market rates to attract investment. Ideally, investment should come within Canada; if investment comes outside the country, then those returns leave Canada. U.S. Fed: they should not hike interest rates, though the street is betting on it, and the Fed likely will.
How the U.S. Fed will react to inflation. The market is pricing in a 25 bps rate increase, with more to follow. But he doesn't think inflation is as big a problem as the market perceives. The Fed's favourite metric is core PCE; its historic range is 2-3%. The Fed's target should be higher than 2% which is not realistic. The oil shock is driving inflation now, but indicators point to median inflation, which is good. Higher rates won't fix high AI spending and will hurt only poorer people.
Regarding concerns over the buildout of AI slowing, he doesn't really see it but is watching it intently. They have some exposure through infrastructure and utility companies. More broadly for the market is the connectivity of oil prices, inflation, interest rates, tech debt issuance, tech debt capex, and Nvidia being the biggest company in the world. This could lead to a downturn. The 10 year Treasury yield above 5% is a concern. If debt is being issued at higher and higher rates for longer terms what happens to capex spending plans. He cautions investors who have been riding these big gains and suggests looking at the 2008 comparison. Two major issues are oil trending higher and staying higher, along with interest rates going up. Make sure you can hold your investments through a downturn.
We're seeing the typical script. In August, his team was warning clients to be careful. Usually you have a swoon in September, which typically lasts until October 11-14. Then we usually go into a seasonal rally and a Santa Claus rally to end the year.
It's playing by the book. But there's no ignoring the fact that there's a 90% chance that the Fed will raise interest rates next week. That's a serious headwind. With 10-year bond yields cross 5%, and oil getting to critical levels ~$100, investors have to start taking notice. You have to wonder if this is just the typical swoon, part of the script? Or is it the start of something more concerning?
For a typical client portfolio (70/30) he's been pretty aggressive, even up to 90% equity. His team believes we're in a really good, unfolding bull market.
When you go into periods like this, you want to have respect for your asset allocation. When things start to turn, they don't turn right away. By the time you get 4 data points, you already have a market that's down quite a bit.
He doesn't think we're going there. This is a buying opportunity. When they add up the sum of the parts of the market (they cover 300 companies), the earnings power we're seeing is unbelievable. It really is. Growth rates are so much higher -- the kind you see coming out of a recession, but we're not. We're 4 years into a bull market.
Earnings growth is so good, he thinks we'll be in an elongated cycle. Things can disrupt that, such as Federal Reserve error or oil going to $150. So you have to be somewhat mindful.
No, growth rates are very strong. Strong for the rest of this year and for next. They look to start slowing to a more regular pace of 12-14% in 2028. But we'll see. The numbers keep getting ratcheted up. The spending is real.
We're seeing productivity gains to small caps, which have been rallying and outperforming. They're very interest-sensitive, so should be going the other way. (They are right now because everything is.) But they've done better than big caps. Productivity gains are being felt across the board.
We're into a really beautiful expansion, and people are still misjudging the upside.
