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The question many local investors are asking is how to sustainably and tactically capitalise on the current so-called megatrends driving markets globally currently. Megatrends are long-term, large-scale forces that shape the world and the most prominent of these currently impacting global investors include artificial intelligence, the energy transition, geopolitics and deglobalisation.
One specific approach to finding this investment opportunity is via key stocks that provide exposure to such megatrends and the regions driving corresponding themes, using diversified tactical allocation.
AI as an investment theme
Looking at AI as an investment theme, which has been driving global tech stocks to unprecedented heights, the JSE offers local tactical opportunities too.
The JSE All Share Index is still heavily skewed towards Naspers/Prosus and diversified resources shares, offering excellent exposure to Chinese technology and the resources needed to fuel global energy transition and technology trends.
Naspers/Prosus, through its investment in Tencent Holdings, is often thought of as a dated ‘play’ in the internet and mobile age. However, the OMIG portfolio manager believes it offers both direct and indirect exposure to the current generative AI trend.
Tencent is already hinting at introducing its own version of the popular OpenAI ChatGPT product, and we believe the Chinese company is capable of replicating the successes of Google, Meta, and Microsoft in areas like cloud computing and natural language programming.
There could be another advantage for Naspers/Prosus, as Chinese technology shares are trading at a deep discount to their US peers.
On the surface, the valuations of the big US-listed technology shares do look stretched, and the market will judge these companies based on how well they manage to monetise their technology and grow their earnings. In the interim, global investors keen on discounted access to the AI and technology megatrend could do worse than China’s Tencent or even the JSE’s Naspers/Prosus.
The resources opportunity
Another indirect way for South Africans to participate in the AI trend is through the resources sector. The latest research points to a huge demand shift for copper and other rare metals used in the manufacture of chips and data storage infrastructure that support AI and generative AI.
If you add the electricity requirements associated with these data centers to the already significant push for green energy, the demand for selected resources will remain elevated.
Copper is a standout metal at the moment, and most forecasters predict tight supply and higher prices in that commodity over the short to medium term. One of the main reasons for BHP Billiton’s bid for Anglo American was that it is easier to buy someone else’s copper assets than bring a new mine online. Supply will remain constrained due to increased environmental scrutiny on new mining license applications and the declining quality of unmined ore bodies.
There is some further good news for contrarian investors, as gold is making somewhat of a comeback. Global megatrends linked to demographics and geopolitics are quite inflationary, creating bullish sentiment towards the world’s long-term favorite precious metal, gold. Analysts expect structurally higher global inflation to underpin the gold price, with the trend playing out over 10, 15, or even 20 years.
We have a higher weighting in the gold sector compared to most of our competitors because we believe deglobalisation and shifts in population dynamics will be inflationary; emerging markets are diversifying their foreign reserves away from US-based assets, and gold has been a beneficiary of that. The bulk of OMIG’s gold sector exposure is through listed gold miners.
There is a close link between the outlook for commodities and the country’s overall economic performance. We are still a resource-dependent economy; a positive view on commodities such as copper is ultimately a positive view on our trade balance—good for overall GDP growth—and good for domestic financial markets.
With around a fifth of the JSE exposed to resources, and another fifth exposed to Naspers/Prosus, these joint AI and resource scarcity megatrends are key opportunities for local investors to explore. DM
By Meryl Pick, Head of Equities Research, Old Mutual Investment Group