Innovation boom led by AI builds opportunities for Aussie investors: Global X ETFs
Australian investors could benefit from opportunities in the US as its economy, markets, and quality companies are far more robust than many are giving them credit for.
Global X ETFs Head of Investment Strategy, Scott Helfstein (pictured) says despite warnings of economic slowdown and stubborn inflation, innovative companies are continuing to outperform.
“What really matters are the three ‘Ls’ – labour, leverage, and liquidity – all of which are painting a positive picture. Consequently, the Fed is sitting back in comparison to the previous three interest rate cutting cycles where it seemed they couldn’t cut fast enough,” Helfstein said.
“The Fed’s 2% inflation target is becoming less credible the longer they maintain their stance, add in encouraging economic data points, stock market strength, and the US election in November, I do not expect a US rate cute until at least December 2024.”
Economic stability is translating to corporate success, with S&P 500 companies delivering profit margins above 12% for 11 quarters straight. In fact, in the last three to five years there has been the same level of margin expansion seen over the last 75 years.
Helfstein says these impressive margins were achieved thanks to company spending and reinvestment, largely in automation and digitalisation – structural megatrends which are epitomised by Artificial Intelligence (AI).
“With the awakening of AI, we are living through the fourth great innovation boom, and it’s being driven by corporate America. Although it may be tempting to compare this market to that of the dotcom era, I’d highlight that the dotcom bubble was exorbitant while the AI rally has been largely rational with lower price-to-forward multiples and performance metrics aligned with quality investing,” Helfstein said.
“The real place we should be drawing a parallel between the dotcom and AI phenomena is that both technologies have and will fundamentally change the world as we know it. So, when people ask me whether they have missed the AI opportunity, I say, ‘sure you may have missed Nvidia, but the ship has far from sailed’.”
“The internet absolutely revolutionised every facet of life, it just took an additional 15 years than when the dotcom bubble burst because there was more groundwork to be done before it was viable, and I expect the same to be true of AI.”
AI is driving capital expenditure and subsequently capital growth in companies involved directly in the development and adoption of the technology, hence the AI thematic will continue to perform, as will the likes of semiconductors and cloud computing.
Helfstein is also looking laterally at adjacent industries which are positioned to benefit from AI expansion such as nuclear energy. He says Amazon’s purchase of a datacentre right next to a small modular reactor (SMR) was a lightbulb moment.
“More AI, equals more computing power, equals more energy – it’s a simple equation really. Nuclear energy is coming online in the US while Japan is turning their reactors back on and major European economies are back under pressure to use nuclear as sanctions on Russian commodities squeeze supply. All things indeed being equal, demand for uranium and nuclear energy will rise alongside AI.
“Ultimately, these thematics can be difficult to access for Australian investors because they are US-centric. Thematic ETFs provide local investors an accessible route to a wide world of opportunities.”
Global X has a lineup of 38 ETFs in Australia, with 11 under the thematic umbrella including the newly launched Global X Artificial Intelligence ETF (ASX: GXAI) and Global X US Infrastructure Development ETF (ASX: PAVE).
