For those weary of the current Artificial Intelligence (AI) and IT frenzy, the good news is that the uptrend in risk assets, such as stocks, is broadening across regions and sectors. However, these gains in Generative AI seem to be here to stay, as once the global AI infrastructure network is established, we believe that more and more applications will emerge.
Fears of a German ‘deindustrialisation’ are also causing speculation, with recent survey indicators pointing to a weak start to 2024. However, after a sharp fall in energy prices in the last few months, it is not as bad as it appears. In fact, contrary to what some may think, the industrial landscape has not fully crumbled, but instead simply changed shape.
A continuous rally in information technology
IT stocks in the US rallied to new all-time highs last week. The rally was fuelled by technology stocks on the back of stellar results and a buoyant outlook on AI. Generative AI has now reached a tipping point, as demand is surging worldwide across companies, industries, and nations on a large scale.
Valuations are still reasonable considering the superior growth perspectives, while large-cap names are highly cash generative. In general, we believe that investments into data centres, AI-software stacks, and new products (e.g. AI-enabled smartphones, PCs/notebooks, AR/VR, automotive, robotics, and many other categories) will drive a massive product upgrade cycle in the coming years.
Once the global AI infrastructure network is established, we believe that more and more applications, such as real-time language translations during calls, will emerge, providing new opportunities for investors.
India’s edge in market diversification
The focus on AI is highly relevant for the emerging market (EM) equity universe, particularly for semiconductor companies in Asia with notable exposure to the artificial intelligence theme.
The strong emphasis on individual companies or industries also raises the question about potential concentration risks. Interestingly, India stands out as the least concentrated equity market, offering the most diversified investment landscape with the lowest dependency on specific heavyweights. This makes India a particularly attractive place for investors seeking EM exposure, as it reflects lower risks towards individual companies or sectors, thereby improving diversification.
India’s current macroeconomic backdrop further supports this as the latest monthly purchasing managers’ index reading demonstrates the resilience of the Indian economy despite the global slowdown. The recently announced interim budget also reiterates the government’s continued push to boost growth. Projecting 2025 GDP growth of about 7%, and making India the fastest-growing major economy this year. Robust growth, coupled with inflation at a three-month low in January and anticipated US Federal Reserve rate cuts, also allows the Reserve Bank of India to change its policy stance to neutral in the coming months.
German economy: Structural change takes its toll
While information technology has seen massive growth, the same cannot be said for all sectors. German economic activity declined in 2023, fuelling concerns of ‘deindustrialisation’ and ongoing growth weakness in 2024. While we expect the German economy to remain weaker than the eurozone in 2024, the most recent economic figures exaggerate the growth problems in Germany.
The large pullback in investment in the last quarter was preceded by a solid expansion in the previous quarters, while equipment investment grew in 2023. Private consumption, which has been weak in the past due to high inflation, has also started accelerating thanks to falling inflation and rising wages. We expect private consumption to be an important growth driver in 2024, with real wages rising and employment still expanding.
Sector data reveals that the concerns regarding ‘deindustrialisation’ are focused on the energy producing sectors, which experienced sharp price increases and were marked by a slowdown in 2023. The decline in the energy sector has a sizeable impact on GDP growth but no negative impact on overall employment growth.
We expect that economic activity in Germany will continue to shift away from energy-producing and energy-intensive industrial activity and move into other sectors, although energy prices have already declined. The shift into other sectors is improving the longer-term growth outlook while still limiting the short-term growth dynamics.
What does this mean for investors?
Overall, the earnings and price momentum for Cloud Computing and AI is still extremely strong, with no signs of fatigue. As a result, we highlight our equity strategy to remain Overweight in information technology.
We also expect that German economic growth will regain momentum in 2024 but that recovery will materialise slowly, as recent survey indicators point to a weak start to 2024. At the same time, a solid labour market supports consumption-driven growth. Accelerating global trade is an additional factor that should help to pave the way for German economic expansion in the second half of 2024.