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Investors size up far-reaching implications of AI boom

market snapshot

2 June 2023 |
Active ESGMacro
Amid concerns about artificial intelligence, the fast-developing technology could also reduce many competitive barriers.
  • US House of Representatives passed a bill to suspend the debt ceiling this week, clearing a major legislative hurdle to resolving the standoff.
  • Silicon Valley-based chipmaker Nvidia, which is behind leading AI applications, hit a $1tn market capitalisation, putting it among an elite group of stocks.
  • Investors hope President Recep Tayyip Erdogan will engage with the market more effectively after winning the second-round run-off in Turkey.

Concerns about whether an agreement can be reached to resolve the US debt ceiling standoff loomed over markets this week. On Wednesday, those worries looked to be receding as the House of Representatives passed a bill to suspend the debt ceiling, clearing a major legislative hurdle. The bill must still pass the Senate and be signed by President Joe Biden to go into effect before the 5 June deadline.

“The Debt Ceiling Bill charged through the House and looks likely to receive Senate approval, although this has done little to lift the mood,” says Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited. “The macro picture continues to drive the market and weigh on investor sentiment.”

Investors positioning for a growth rally will have to wait that little bit longer

The latest data highlighted the resilience of the US labour market, with the number of job vacancies unexpectedly rising in April, adding to expectations of further rate rises by the US Federal Reserve1.

“It is becoming increasingly apparent that we haven’t reached peak interest rates in the US, with another hike likely in the coming months,” Grant adds. “Investors positioning for a growth rally will have to wait that little bit longer.”

European equities advanced on Thursday, after the US House passed the debt bill, with the pan-European Stoxx Europe 600 rising 0.8%. The UK blue chip FTSE 100 closed up 0.6%2.

AI: risk and reward

In a week when chief executives and scientists from companies including OpenAI and Google DeepMind warned that artificial intelligence (AI) presented an existential threat to humanity, the far-reaching implications of the new technology was also in the minds of investors.

US chipmaker Nvidia – which manufactures the microchips that power leading AI applications – briefly reached a $1tn market capitalisation3, putting it among an elite group of stocks, as investors piled into the company on the expectation AI tech could revolutionise many areas of commerce.

The Nasdaq CTA Artificial Intelligence and Robotics Index has risen 23% year-to-date as at 2 June4.

Figure 1: Investors betting on AI applications

“The one area of the market paying no heed to broader macro uncertainty is AI,” says Grant. “Investors are left asking if they can justify such elevated valuations and leave balance sheet fortresses in the face of mounting macro uncertainties.”

Grant says his team has been looking beyond AI hardware to identify those companies which can rapidly turn AI advances into products and cost efficiencies. “AI will reduce many competitive barriers, and identifying which industries are best protected may be the safest approach for investors,” he adds.

Can Erdoğan change?

In Turkey, long-time President Recep Tayyip Erdoğan won the second-round run-off on 28 May to extend his rule into a third decade, although the election highlighted deep divisions in the country.

Mohammed Elmi, Senior Portfolio Manager for Emerging Markets Fixed Income at Federated Hermes Limited, says Turkish fixed income markets had already largely priced an Erdogan victory after his strong first round performance. “The reaction post the second round has been positive, with the focus now on the formation of the Erdogan’s cabinet,” says “The hope is that he can instigate much needed economic orthodoxy and engage with the market more effectively,” says.

After spiking ahead of the election, the yield on Turkey’s 10-year government bond dropped 37% between the first round and the second-round run-off5.

Figure 2: Debt markets cautious after Erdoğan win

“A simple return to credible economic policy could see a marked change in Turkey’s investment appeal. With inflation running at 44%, monetary policy needs to be tightened significantly to a restrictive stance. Central bank credibility also needs to be restored with less political interference,” Elmi adds.

“The long-term outlook for Turkey is still very much a positive one. A core emerging market economy that is part of the G20, a young population, a burgeoning middle class, and a country that occupies a key strategic location, it has a number of factors in its favour.”

For further insights on Emerging Markets Debt, please see our Q2 EMD report.

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