From the studio

Video: Investors Club | US equity positioning and the Australian dollar (9 mins)
Video: Deep Dive | CIO's Themis Themistocleous on European opportunities (6 mins)
Video: The AI Show | US tech earnings and positioning (4 mins)
Video: CIO's Jeff Harwood on opportunities in US financials (6 mins)

Thought of the day

NVIDIA posted better-than-expected results for the January quarter on Wednesday and guided for revenue for the current quarter to come in above market expectations as hyperscalers continue to invest in AI infrastructure in the race for more compute capacity.

The chipmaker's share price, however, pared earlier gains in after-hour trading on growing worries over the pace and scale of AI capital expenditure growth. With the largest hyperscalers’ investment plans this year likely to consume nearly all of their operating cash flows, we expect capex growth to decelerate going forward.

But while this means investors will have to be more selective in choosing the beneficiaries of this spending, we believe the breadth and duration of the investment opportunity in our Power and resources theme remains intact.

The Power and resources theme targets an opportunity set that is much broader than simply feeding power to AI data centers. Data center investment is among the fastest growing areas of the overall Power and resources market. But the Energy Information Administration estimates data centers would account for less than 10% of total US electricity use by 2035. The segment also represents only around 8% of the USD 32tr of cumulative spending on electrical infrastructure we project over the next decade. We see encouraging trends in grid resilience and transmission infrastructure, power generation and renewables, building electrification, industrial automation, critical minerals, and other relevant segments. Additionally, many products sold by companies in the power and resources sector (e.g., transformers, switchgears, metals) can also be used across multiple applications, not just for data centers.

Peaking growth of hyperscaler capex should have only limited impact on the companies in the power supply chain. Given access to power represents a key bottleneck to faster data center progress, many companies in the supply chain have record backlogs covering more than a year of future sales and embed increasingly higher prices. This implies that margins should expand as revenue is recognized. Without commenting on individual securities, recent results have underlined this trend: Eaton’s data center orders rose 200% in the fourth quarter; Vertiv’s total orders jumped 252% in the fourth quarter; and nVent Electric saw roughly 250% data center order growth in the third quarter. This supports our view that the duration and magnitude of the opportunity from this end-market is greater than many investors appreciate.

Exposure to physical assets should insulate these companies from market concerns about AI disruptions. The recent changes in our US equity preferences (downgrading broader US tech to Neutral, and upgrading industrials to Attractive) reflect our expectation that AI will be disruptive to digital products, but physical products will be more difficult to be disrupted by the technology for now. As energy demand continues to rise globally, we believe exposure to quality industrial, utility, and materials companies that operate and sell physical assets is a compelling way to participate in pro-cyclical market rotation with relatively low risk of disintermediation from AI.

So, we maintain our conviction in the Power and resources theme and believe it offers attractive opportunities for investors looking to broaden their exposure beyond US tech. Investors can access this theme directly through CIO’s "Power and resources" portfolio, through pooled vehicles including active commodity approaches, or through private market infrastructure approaches linked to data center build out and maintenance.