There’s more to AI stocks than just Nvidia

24 Jun 2024

Article written by Cliona O'Dowd. Published in The Australian June 23, 2024.

Investors are piling into the world’s most valuable stock, Nvidia, but adviser to the ultra rich LGT Crestone is taking a more cautious approach.

Nvidia last week briefly became the world’s most valuable company, propelling it past Microsoft with the chip maker’s market cap now standing at $US3.1 trillion, or about $4.6 trillion. It is also now the most traded stock on Wall Street, with an average daily trading volume of $US50bn.

Speaking to The Australian, the wealth manager’s head of public markets, Todd Hoare, said investors seeking AI exposure didn’t have to be limited to the likes of Nvidia, Microsoft and their peers, with broader investment opportunities already coming through. However, some sectors, such as healthcare, were a prospect for the more patient investor.

“We are fundamentally positive towards AI but you can misjudge the timing of large technology and thematic shifts and, if history is any guide, in the very near term we need to be cautious about the benefits accruing to companies and markets,” Mr Hoare said.

And it was not just sectors or specific stocks investors should be weighing up, but also which countries stood to benefit the most from AI, Mr Hoare said.

“If you think about what AI is, in essence it’s basically an acceleration in the automation of jobs. At the end of the day, it’s a productivity boost and when we think about which countries or economies need a productivity boost, invariably it’s those that are the most ageing or that have the biggest demographic headwinds,” he said.

“The way we’re trying to position our clients is not to necessarily run away from Nvidia and the Magnificent Seven, because we do believe a couple of those stocks will be clear winners, but just to understand where we need to be in the technology stack. If Nvidia, Alphabet and Microsoft are to be genuine AI winners, then the benefits can’t just accrue to other big tech companies in that universe.

“The usability and the applications AI might bring have to broaden well beyond five or 10 big tech stocks and we would suggest that relative benefits are probably going to accrue as much, if not more, to mid-cap companies if this is a real productivity shift.”

Noting the challenges Australian investors can face to do the legwork on overseas small and mid-sized companies, Mr Hoare said he was advising clients to get exposure to this segment through global exchange-traded funds.

Similarly, for Australian investors looking for exposure to the countries that are likely to benefit the most from AI, ETFs were a good option. (Australia will benefit from AI but it is not on his top list because demographically it’s had productivity gains through migration and the population isn’t ageing as rapidly as others.)

Instead, Korea, Japan, China and parts of Europe would all benefit more due to their ageing populations, Mr Hoare said.

“You can get exposure through a variety of ETFs or through companies that might sell to those markets. Certainly that’s what we’re suggesting to our clients.”

“Goodman Group is, in part, turning itself from a traditional industrial warehouse business into a business that has a development pipeline in the billions of dollars for data centres,” he said. “And so its performance has been very strong, and partly justified, but also partly because the average Australian investor who only invests domestically doesn’t have a lot to choose from (in terms of AI), and so they got funnelled into one or a handful of stocks.”

Local healthcare stocks, meanwhile, were worth a look for the long-term investor, he said.

“One of the issues with AI is the progress we’re seeing; it’s still really only in its infancy,” he said. “To bring a drug or a particular product to market in the healthcare space takes a number of years, so we haven’t really seen the benefit of (AI) there yet. There’s a whole host of potential applications. What can CSL do with drug discovery, using AI? What can Resmed do in terms of sleep apnoea and the data they’re accruing? What can Pro Medicus do by integrating AI into its software suite to reduce radiologists’ hours?

“It’s probably a little bit premature to say we’ll see it in the near-term financials over the next 12 to 18 months. I think we will see it eventually but just not in the very near term.”

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