![Q3 2024 Capital Markets Perspective [PODCAST]](/content/dam/thrivent/fp/fp-insights/advisors-market360-podcast/compass-insights-card-v1.jpg/_jcr_content/renditions/cq5dam.web.1280.1280.jpeg)
Q3 2024 Capital Markets Perspective [PODCAST]
Our experts lay out their expectations for the third quarter and the months beyond.
Our experts lay out their expectations for the third quarter and the months beyond.
07/11/2024
MARKET UPDATE
08/27/2024
The opportunities and pitfalls of investing in AI-related companies.
If you’re looking for a way to invest in generative AI instead of just reading stories about it, stay with us for our expert insights into this technology.
(Music)
From Thrivent Asset Management, welcome to Advisor’s Market360™, a podcast for you, the driven financial advisor.
When thinking about technology, an apt analogy is the weather. Not too long ago, technology was like a whispering breeze—offering ways to improve people’s lives. Then came the raindrops of programs for consumers to use on computers and personal devices. And now we’re looking at a thunderstorm generated by the forces of artificial intelligence, or AI. The effects of AI go beyond just technology to the investment world.
Artificial intelligence has been around for a while, but the force at play over this past year is a new type of AI known as generative AI, which is capable of creating new content by learning to identify patterns in existing content. And since generative AI blew into the picture, mega-cap technology stocks have dominated the S&P 500 Index.
Long-time listeners of this podcast may recall an episode last year in which we introduced the newly emerging theme of generative AI and broad approaches to investing in it. Today, we’re revisiting the topic and providing fresh perspectives on why investors might consider investing in AI.
So where should investors look for quality investments in the AI space? Is there opportunity outside of the familiar mega-cap names? And what risks should investors watch out for? Will increased productivity boost inflation? To answer these questions and more about investing in AI, we’ve invited Thrivent Asset Management experts who keep their eyes on the technology climate, staying on top of this rapidly developing sector. Returning to the podcast is Senior Equity Research Analyst Peter Karazeris. Also joining us is Senior Portfolio Manager Jaimin Soni, who co-manages Thrivent Large Cap Growth Fund with Senior Portfolio Manager Lauri Brunner.
Let's get into it…
(Music transition)
From an investing perspective, where are we at with AI? First, let’s hear from Karazeris as he breaks down all the different industries involved with delivering generative AI.
Karazeris: I think the best way to understand it is there's really three big buckets to look at, and we can talk about those and where we're moving. The first bucket is building what we call frontier models. This is the hyperscalers, the guys you know, like Microsoft, Google, Meta, Amazon. There's some other companies that are very focused on this. Companies like Anthropic and OpenAI. And then there's companies like Tesla, who are also building these huge frontier models. There's a second bucket, which is the enterprises which are now just starting to get into applications that are going to be generative AI applications. And then there's a third bucket, which is the end devices, PCs and handsets, which are also going to have on-device AI running.
We asked Soni to provide a historical perspective on how companies invest in technology.
Soni: When we look at similar technology innovation cycles in the past, like the build out of the Internet or the growth of the public cloud providers or development of 5g, there is a pattern that is evident. What happens is that initially the tech infrastructure is laid out. That creates a foundation, which means a lot of investment goes to the hardware providers. Now, during the Internet build out, it was companies like Cisco that benefited. They put out the fiber lines that are used to run the Internet today.
In the public cloud build out, it was server manufacturers like Intel and AMD who benefited early on. Now, after a large part of this infrastructure is laid out, software and internet companies create new applications that help drive revenues and the return on all the investment that has happened. For example, after the internet cycle, we got applications like e-commerce and search and social media, which are some of the use cases that have generated billions in value for investors.
When it comes to the companies that are at the forefront of the current AI wave, Soni mentions many of the companies that Karazeris did:
Soni: With the advent of generative AI, we are seeing billions getting invested in build out of this infrastructure. And companies like Nvidia who provide the chips used for generative AI, they are called GPUs or graphics processing units. They are the main beneficiaries.
The public cloud companies like Microsoft, Amazon, Google are the ones who are building on top of these Nvidia chips and creating services for anyone who wants to use generative AI. So, these are the companies who have seen their revenues and market caps benefit. And as of their latest quarterly earnings report, we are seeing increasing momentum.
Just as a quick example, Microsoft reported their earnings on July 30 and said that they now have 60,000 customers using Azure AI, which is up 60% year-over-year. So that's where we are right now in this trend. We think this is still early and there's a lot more to come.
(Music transition)
The promise of generative AI for many companies is that it will be a boon for productivity. But will that increased productivity have the unintended affect of pushing inflation higher? Or will it be more of a wash with the incumbent decreases to supply and labor costs? Fundamentally, how will AI affect companies and their returns? Here’s Karazeris’ take on how it might affect the services industry…
Karazeris: On the services side, when you have rising salaries, lower productivity, how do you create productivity? And in my view, productivity gains quite often are technology based. (09:21) So there's, you know, theories of how generative AI, or AI in general, but generative AI specifically can help drive productivity gains.
And his thoughts on the rest of the commercial industry …
Karazeris: I think the enterprises are figuring out exactly how they want to approach things going forward. And one of the things they're trying to decide is productivity gains. Their developers have become more productive. So how much more can they do with custom applications than they've done in previous generations, right, the last two cycles? If they can do more in-house, maybe they're going to buy a little less prepackaged applications and do a little more in-house.
As a fund manager, we wanted to get Soni’s take on how generative AI is already driving productivity gains that benefit companies.
Soni: Yeah, so here we are starting to hear more and more concrete examples on how productivity is benefiting from usage of Generative AI. The low hanging fruit here has been in areas like software development. Microsoft has a Copilot for code development available for almost a year now, and they just reported that 77,000 organizations are using it, which is up 180% year over year. Other areas of productivity improvement have been in customer service, where generative AI tools can help call center agents become more efficient.
And we recently heard about an insurance company that is rolling out a generative AI application internally that is helping them reduce the process of filing claims from more than two weeks to one day. So we are starting to hear more of these use cases. They may still be in narrow areas, but we expect them to grow over the coming months and years. And when companies are able to free up resources, we believe they will direct them to new growth opportunities, which can help drive GDP going forward.
(Music transition)
Of course, with any investment opportunity, even one as promising as those related to AI, there are risks that need to be accounted for. One such risk is governmental regulation. Here’s Soni:
Soni: Generative AI applications need to get trained on massive amounts of data so they can be useful. A lot of times this data sits within the enterprise. It is not properly organized and easily available for training, and if it's data on the Internet, it can be behind paywalls and there could be copyright issues depending on who owns it. So, we don't have very well defined regulatory and legal frameworks yet in terms of addressing these issues.
There are other risks that could derail current AI developments. Karazeris elaborates on one of them:
Karazeris: I guess you'd call it an external risk. It's the geopolitical risk, because the reality is a lot of the infrastructure, the chips that are being built, the electronics that are being built, that underlie, undergird. All of this is built out of, frankly, Taiwan and around the Pacific basin. So, any geopolitical unrest there between countries like Taiwan, Japan and naturally China, that is a risk as well.
(Music transition)
Next, we want to get our experts’ thoughts on the future of generative AI. How can companies best harness its powers? First up is Karazeris…
Karazeris: The best place to be is somebody who knows how to take advantage of it, and the worst place to be is somebody who is pushing it away. And I really suspect that we're going to find five and ten years down the road, is that if these new applications that the enterprises are building and the new applications that are getting built on phones really are something better, you're going to want to figure out ways to take advantage of that.
Next, Soni offers a shorter-term look ahead:
Soni: In general, the trends we have seen thus far is that the value from generative AI is getting aggregated to the big tech companies. And over the next few quarters and year, we think this is likely to continue. These big companies are the only ones who have the capital to invest and build out this very expensive infrastructure which powers generative AI.
So, the hardware providers like Nvidia and even AMD to some extent benefit as their chips are in high demand. Utility companies have benefited as power demand for AI data centers has gone up, and tech companies like Microsoft, Amazon, Google and Meta, who are spending billions to create applications and services using generative AI, have benefited. Now we also think generative AI applications will migrate to the edge and users will be able to access them on their phones, which can benefit companies like Apple, who makes the iPhone and Qualcomm that provide chips for phone manufacturers like Apple and Samsung.
And while AI could be a good opportunity for investors, returns might not be forthcoming for those with a shorter time horizon. Soni explains:
Soni: There is a big debate going on right now on when will we see the returns from generative AI match the very high level of investment that is currently taking place. And even Microsoft is telling us that they're not looking at the near term. They are laying the groundwork for the next ten to 15 years. So, this is an area where I think it's important to acknowledge that returns won't always come in a linear fashion and patience will be required. That said, the companies I mentioned are where we are focused on over the coming year.
(Music transition)
In the space of just over a year, AI has evolved from a very niche area of technology to one that everyone is talking about. The market reactions to generative AI have been just as powerful with big tech companies continuing to drive the S&P 500 Index. Where is AI heading and is it potentially a good investment? We will let Karazeris have the last word on AI:
Karazeris: One thing I know is that there's what I know, and there's a lot more that I don't know. So I'm keeping an open mind.
(Music)
We hope you enjoyed this deeper dive into investing in AI. Once again, we would like to thank Jaimin Soni and Peter Karazeris for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360™ and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.
(Disclosures)
All information and representations herein are as of 8/14/2024, unless otherwise noted.
Past performance is not necessarily indicative of future results.
Investing involves risks, including the possible loss of principal.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This podcast refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Any indexes mentioned are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
Asset management services provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Asset Management, LLC is a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.