Thoughts on the Market: August Edition
Written by Head of Research, Jamie Murray, CFA
It’s All Fun and Games Until Someone Loses AI
The technology sector has lagged the broader market since early July. Investors are questioning the level of capital investment needed to build out AI networks and the ultimate return on investment that will be achieved because of this heightened spending phase. Capital spending is projected to increase through 2025, as new AI computing hardware arrives, and along with it, the hope of ushering in a wave of AI breakthroughs.
Although the recent weakness is unwelcome, it is healthy for sectors to fall out of favour, particularly when considering the returns technology stocks have generated over the past two years. Since the start of 2023, the NASDAQ 100 Index, heavily featuring the likes of Nvidia, Tesla, Apple, Microsoft, Meta, Broadcom, and Amazon, has returned 79% and seen weekly positive returns 64% of the time, a win rate of two to one. It is safe to say that it has been a phenomenal bull market.
AI technology remains in its infancy, and the victors will deserve the spoils that follow. We remain in the camp that large technology companies remain in the driver’s seat, with strong financial resources, engineering talent, proprietary data sets and product distribution. However, a game of musical chairs continues to be played with the fragile alliances being forged among tech giants, startups, and research institutions.
In late August, it was announced that Apple was considering investing in Open AI, the ChatGPT creator and Microsoft partner. This comes on the heels of U.S. Antitrust lawsuits targeting Alphabet and its exclusivity agreements with Apple that entail payments of ~$20 billion per year to Apple and grant Google search exclusivity as the default option on Apple’s Safari browser. In autonomous vehicles, Uber signed two partnerships with leading self-driving vehicle companies (GM Cruise and Wayve) to offer autonomous vehicle testing on the Uber platform.
As we look ahead, the interplay between innovation, regulation, and competition will continue to shape the tech landscape. With the rapid advancement of AI technologies, the lines between sectors are becoming increasingly blurred, as companies from varied industries seek to integrate AI into their core strategies. This cross-sector integration is not just limited to autonomous vehicles or digital advertising; it’s expanding into healthcare, finance, retail, and beyond.
We hold strong to our belief that the AI industry will be the rising tide that lifts all boats and continue to maintain our exposure to this ongoing mega-theme. New Nvidia GPU (graphic processing units) architecture (H200s and Blackwell later in 2025) should spur ongoing investment and potential new breakthroughs. Earnings reports from Microsoft and Broadcom highlighted that capacity constraints, not demand, are choking growth short term, but that growth rates should accelerate in mid-2025. Meta provided a glimpse at “what AI can do for you,” with revenue growing 22%, well above expectations.
We believe that the mega-cap technology companies have multiple ways to win, either by distributing new AI applications with their own consumer services, or as a cloud services provider, both of which could provide durable revenue growth for the future.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund rose 0.3% in August, slightly below the 0.5% rise in its benchmark. Year-to-date, the Fund has returned 20.6% versus the benchmark return of 18.5%. The Fund’s top three performers in the month were Starbucks (+19%), Adyen (+18%) and Eli Lilly (+17%), while Linamar (-8%), Prudential (-7%) and Alphabet (-7%) were the biggest detractors.
Portfolio Managers Summary
The market rotation into interest rate sensitive sectors continued in August, with the long neglected 492 stocks in the S&P 500 handily outperforming the Magnificent 8 with utilities, consumer staples, health care and financials leading. The market is transitioning to a lower growth, lower inflation outlook, which initially helps defensive companies with higher debts loads as lower interest costs provide a tailwind for cash flow. However, we expect high quality companies to outperform as lower rates stimulate higher levels of investment and improve the prospects for acquisitions. Consumer spending is soft globally but should improve with lower interest rates and a subdued outlook for commodities.
INCOME GROWTH FUND
The MWG Income Growth Fund increased 1.2% in August, slightly above the 1.0% increase in its benchmark. The Fund is higher by 11.6% year-to-date versus the benchmark increase of 15.4%. Enbridge (+7%), Chemtrade (+7%) and Pro REIT (+6%) were the top performers, while Pfizer (-7%), BP (-5%) and Whitecap (-3%) were the top detractors. The fund yield was 6.1% at month end.
Portfolio Managers Summary
The Federal Reserve confirmed its intention to start cutting interest rates in earnest, with the first cut taking place at its September 18 meeting. We believe other developed nations will follow suit. With inflation firmly in retrenchment, we believe markets will shift back to growth mode entering 2025, which should provide a goldilocks environment for high dividend paying equities. Lower interest rates should lower dividend yields, and a non-recessionary environment should sustain them. We have already witnessed large moves higher in some dividend stalwarts like Enbridge and Capital Power but expect laggards like Gibson Energy to respond shortly to lower rates.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.