How AI boom is obscuring the big investment opportunity in commodities

A cursory glance at the performance of global stock markets this year suggests exposure to the boom in artificial intelligence (AI) is the overriding determinant of returns. Technology-heavy equity markets, especially those with a high concentration of leading semiconductor and tech hardware firms, have performed spectacularly. South Korea and Taiwan, major semiconductor hubs, are the poster children for the AI trade. The global chip shortage has led to a dramatic increase in the earnings and valuations of a handful of chipmakers, causing the stock markets of South Korea and Taiwan to rise more than 90 per cent and 50 per cent respectively this year. Taiwan’s equity market is now the world’s fifth-largest, having overtaken India this month, according to Bloomberg data. The findings of Bank of America’s latest global fund manager survey on May 19 showed that overweight positions in global semiconductor companies and the “Magnificent Seven” group of US tech giants were the most popular trades in markets. However, the energy shock triggered by the US-Israeli war against Iran has shone a new light on global markets. Even before the crisis erupted, investors were starting to favour asset-heavy, real-economy-focused companies with durable business models, partly because of fears about the disruptive forces unleashed by AI. On February 8, Josh Brown, chief executive at Ritholtz Wealth Management, came up with the “Halo” acronym, which stands for “heavy assets, low obsolescence”. This was meant to describe companies whose businesses are deeply entrenched in the sectors in which they operate, making them hard to replicate or displace. Examples of Halo companies include supermarket chains and insurance firms, yet the industry where the barriers to entry are the highest and which is among the most capital-intensive is commodities. The energy shock has underscored the importance of supply chain security and resilience. Shortages of energy and industrial inputs, which are most acute in countries that rely heavily on imports from the Middle East, have put a premium on physical assets from natural resources. Jeff Currie, executive co-chairman of Abaxx Markets, believes global investors are missing the forest for the trees. In a post on social media platform X on May 15, Currie said “capital has chased the AI trade while ignoring the physical assets AI requires to run – assets that have quietly become the best-performing asset class of the decade”. Since October 1, 2020, the Quantix Commodity Total Return Index has risen 200 per cent, compared with a rise of around 120 per cent for the tech-heavy Nasdaq Composite Index. Even in the past 12 months, when the AI boom was in full swing, the energy sector in the MSCI World Index – a gauge of stocks in developed economies – performed almost as well as the tech sector. Yet, as Currie points out, commodities have been starved of capital. While the combined weighting of the information technology and communication service sectors in the benchmark S&P 500 index has surged to 46 per cent, the energy and materials sectors constitute only 5.4 per cent. Even in the rest of the world, energy and materials account for just 12 per cent of the MSCI All-Country World Index ex-US, a gauge of global stocks that excludes the tech-heavy US market. Currie said markets are in the early stages of an underappreciated commodity supercycle that is likely to have far-reaching implications for asset allocation as “the revenge of the old economy” takes hold. This time, however, geopolitical realignments and the weaponisation of trade and supply chains are forcing countries and regions to become more self-reliant and resilient. The Halo narrative has been misunderstood. “This is not an AI disruption story,” Currie said. “It’s a deglobalisation story. Halo is better read as hard assets, local operations.” China is ahead of the curve and is well placed to capitalise on the Halo trade given the critical importance of the industrial, high-end manufacturing and energy companies powering the country’s innovation and self-sufficiency drive. Societe Generale said there is a “broadening of earnings growth beyond the technology sector to sectors like materials, industrials and energy”, which are among the industries that stand to gain from the normalisation of China’s producer prices. In a report on May 13, Morgan Stanley said it preferred the onshore equity market, given the higher concentration of “upstream asset-focused sectors” against a “backdrop of energy sufficiency and efficiency being re-prioritised”. If Currie’s thesis that the world is in the early days of a multi-year commodity supercycle is correct, tech-focused investors should be rebalancing their portfolios more aggressively. Yet the AI trade, especially semiconductors, remains a high-conviction bet, underpinned by the data centre construction boom. Despite signs of froth in tech-heavy equity markets, most respondents to Bank of America’s survey believed that AI stocks were not in a bubble. Moreover, the AI trade has been a powerful counterweight to geopolitical threats. A much sharper and more sustained sell-off in the tech sector would be far more damaging to sentiment, potentially triggering a financial crisis. Even so, it stands to reason that more capital needs to be allocated to the physical assets powering the AI buildout. If there is a major rotation of capital in global stock markets, commodities are the “one asset class on the other side of that [AI] trade big enough to absorb [the outflows from the tech sector]”, Currie said. The Halo trade could be the next big thing in markets.

How AI boom is obscuring the big investment opportunity in commodities

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Investors’ desire for firms with ‘heavy assets, low obsolescence’ has turned the spotlight on commodities, a sector starved of capital

Investors’ desire for firms with ‘heavy assets, low obsolescence’ has turned the spotlight on commodities, a sector starved of capital