By Nabil Hanano, associate portfolio manager, global growth equities, T. Rowe Price
Investors are facing three significant shifts in the market: artificial intelligence (AI), artificial incretins (GLP-1) and investing in a world different from that of the last decade. In our view, AI represents a significant shift, from a fundamental perspective, thanks to a portfolio of stocks that we believe can span the entire spectrum of the economy, from semiconductors to software.
Artificial incretins are creating a substantial new market in obesity, which is expected to absorb a share of medical costs. Finally, there is sufficient evidence for all to see that the Covid-19 pandemic has changed the world, taking it on a different path, characterized by higher rates, higher inflation and greater geopolitical instability.
The appeal on industrialists returns
Over the past year, we have been underweight industrial stocks, due to the slowdown in post-pandemic growth and the contraction of the ISM PMI index. The exit from Covid has had a different impact in various sectors and within the sectors themselves. Recently, we have identified a number of opportunities in high-quality industrial companies that can fit the revenue improvement framework. These include: Old Dominion Freight Line (part load freight transport), Canadian Pacific Kansas City (railways), Keyence (industrial automation) e Amphenol (leading company in the connector sector, with approximately 20% of revenues exposed to data processing centers).
We are in a interesting time for industrial stocksas a series of secular dynamics, such as electrification and automation, coincide with a favorable cyclical structure, which has historically represented an interesting context for holding this sector in the portfolio.
Positive economic data
On the economic front, we are positive about the recovery as economic data has started to stabilize and normalize post-Covid. China has also stabilized in some way: it has lost appeal and has remained at low levels, and no longer represents a real problem for many companies. The ISM in manufacturing has been below the 50 level for the last 16 months, marking the longest negative cycle in over 20 years, which is also set to be the third largest negative cycle since the late 1940s.
New orders, a subcomponent of the index, showed a positive turn in January and suggests we may be close to an inflection point. All this is in line with the comments of several companies active in transportation and those in short cycle (which quickly replace a large amount of low-priced inventory), from which it transpires optimism across several end markets ranging from retail to industrial.
From electrification to automation
The companies also highlighted the impact of AI on the industrial complex. Companies that support the construction of electrical systems and data centers performed particularly well. For what concern electrical sectorjust consider that each Nvidia H100 chip consumes as much energy as an average family in a day.
The average GPU-equipped data center consumes 5-10 times as much and requires a similar amount for cooling. Workloads for power companies have increased from two to five yearsgiven that large Internet companies are planning to build data centers until 2028. In terms of portfolio, we continue to operate in both the electrification and automation sectors.
AI and obesity drugs
So far in 2024, approaching these two topics in the right way seems to be the only thing that matters in the market. What may surprise some is that AI and artificial incretins are actually quite similar from an economic perspective. Both operate in a monopoly/oligopoly structure, both sell everything they can produce, as their production capacity is limited, and both participate in large reachable markets: the chip market is estimated at 400 billion dollarsthat of obesity in 200 billion dollars. Both also have to deal with high barriers to entry. In fact, it is very difficult to create a new chip or build a new pharmaceutical manufacturing plant.
READ ALSO: “5 Asia-Pacific Stocks to Ride the AI Revolution”
The Nvidia case
After Nvidia reported its earnings, we were surprised: we had never seen anything like it. The challenge is that this is infrastructure, not service software or a utility. The particularity? There is only one company in the world to buy GPUs from, therefore, Nvidia benefits on a gigantic scale and Internet companies depend on it. The question that arises spontaneously is the following: how long can this situation last?
Nvidia may be near peak growth, or even decelerating, as its revenue range narrows, but the vast majority of companies using AI are accelerating. Therefore, the AI theme is likely to remain strong for the coming year as well. As a result, we continue to maintain an overweight position in Nvidia.
Other AI stocks include companies that make semiconductor capital goods Taiwan Semiconductor Manufacturing And Asml Holding, for which a significant acceleration of orders is expected. The portfolio also holds Advanced Micro Devicesfor which we expect an acceleration of both the CPUs and the introduction of the MI300 (the respective chip for the GPUs), as well as Microsoft And Amazonwhich feature cloud computing activity expected to accelerate in 2025. During earnings season, many technology companies confirmed that it is accelerating, benefiting demand for infrastructure and chips, and providing monetization opportunities to other technology stocks and sectors.
READ ALSO: “The weight-loss drug Ozempic makes Novo Nordisk stock soar: it is now worth more than Tesla”
The headlines in the fight against obesity
While this is not a breakthrough, we believe we are still early in the GLP-1 adoption cycle. There are approximately 100 million obese people in the USA alone, and approximately 50 million have taken out insurance coverage, while less than one million are undergoing treatment. We hold both Eli Lilly That Novo Nordiskas well as the Japanese pharmaceutical company Shionogi to participate in the GLP-1 cycle. Capacity has been an issue for both Eli Lilly and Novo Nordisk, but we believe we are about to see a reacceleration of GLP-1 prescription growth.
READ ALSO: “The boom in slimming drugs is driving the pharma sector crazy: who is challenging Novo Nordisk and Eli Lilly”
To address capacity issues, Eli Lilly has started production at its second main plant in North Carolina, but this has not yet impacted prescription volume. We’re seeing that launch of the anti-obesity drug Zepbound surpassed that of Mounjaro, which was much quicker in terms of input. Meanwhile, at the beginning of February Novo Nordisk announced its intention to purchase Catalent for $11 billion, which should speed up production capacity by a couple of years, as it won’t have to hire new staff, train workers or build new plants.
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