This week AI continued to dominate both headlines and markets with a mix of developments
Controversy regarding Nvidia’s CEO Jensen Huang involving an affair with alleged Chinese spy caused a sharp sell-off in the company’s shares - and ultimately lead to his resignation today.
Concern over datacentres being held up due to the midterm election results.
A market wide tech sell-off.
Oh, and Anthropic is preparing to launch a $1.4tn IPO.
This isn’t the AI bubble bursting
Companies are still putting in AI orders, selling their AI services and generally going about their AI business. But key questions have been asked that the market is trying to answer:
Will the speed of the buildout of data centres slow now that the Democrats are in congress?
Will they seek to regulate AI more closely?
Do the costs of AI infrastructure need to be so high, and do their revenues support those costs?
Nvidia must also answer questions over its corporate governance and key-man risk with its CEO’s activities.
The sell-off has mainly been on the supply side of AI. Power, data centres, chips. It’s worth remembering that throughout the development of AI, there’s been not enough supply to keep up with demand.
Demand still looks strong. Businesses aren’t pulling back their spending plans, and customers aren’t using less AI. But things might move at a slightly slower pace.
As with any new technology, some companies will be winners, but not all will be. Some look to “Pick and shovel companies” like Nvidia and TSMC who make the chips that are necessary for the AI roll out, just like the shovel makers in a gold rush. There are also energy companies and datacentre developers who make everything possible, the hyperscalers like Google and Microsoft who are looking to use those data centres, and the model builders like Open AI and Anthropic.
Anthropic’s make or break moment
Anthropic is due to float it’s shares on the stock market next week, seeking a valuation of $1.4tn raising up to $100bn. That would signal robust demand and eclipse SpaceX’s IPO.
The IPO will be a bellwether moment for AI, determining whether investor appetite is still there. $1.4tn is a lot more than the $965bn Anthropic valued itself at in May, and other AI exposed names have had a mixed performance since then in equity markets.
Many cornerstone investors like AMD and Google are present, investing up to $26bn. It represents faith in the company but also does reflect some circular financing. These companies will be suppliers to Anthropic in the future, so they want their long-term customer to succeed, propping up their own market valuations which reflect that spending by Anthropic.
There are signs that the IPO could be fully funded, with many institutions having long lock up periods. But if the cornerstone investors’ capital expenditure is called into question wider impacts could be seen across the market.
Markets are very concentrated
Following heavy trading in AI-linked stocks over the last two years, markets are very concentrated, with stock market movements in the US and Asia directed by just a handful of companies. 10 companies make up 39% of the S&P 500. Two chip companies make up 67% of the MSCI Korea Index.
Many passive indices are far more concentrated than investors realise. Yes, the S&P 500 is 500 companies, but most of the movement is driven by 10 tech-based companies.
That concentration can work well when sentiment is positive but can mean steep falls when sentiment turns negative.
We love passive investing, but we don’t think there’s a one stop shop passive tracker. An asset allocation on top works to build a more diverse portfolio.
What are Parmenion Investment Management doing?
Moments like this remind us why a portfolio needs asset allocation and risk management - and why we should seek out diversification where we can find it.
Diversification away from AI:
Measuring AI exposure across holdings: looking at equity, credit and private market holdings, not just equities. Also, we look at how those positions connect different companies.
Stress testing: measuring the whole portfolio in certain stressful scenarios.
Evaluating indices: different indices will have different levels of exposure even if at face value they seem similar.
Areas of diversification in our portfolios:
UK: historically unloved and undervalued, it hasn’t seen the same level of volatility, because it has a completely different make up of companies to the US and Asia.
Global Smaller Companies: small caps can drive returns with growth potential and diversification away from mega-cap concentration.
Alternatives: we’ve long championed our Diversified Alternatives Asset class and have recently launched the MGTS Parmenion Diversified Alternatives Fund which offers exposure to gold, infrastructure and private equity. It’s an asset class which has typically risen in value when equities and bonds fall.
We take a long-term approach
All solutions in Parmenion Investment Management’s Outcomes Range are structured around a carefully considered long-term view, designed to give clients the best possible chance to achieve their goals. Learn more about our investment philosophy and how our portfolios are built to look beyond short-term market noise.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
