<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Izak Odendaal, Old Mutual Wealth investment strategist. Izak, appreciate the early morning time. In a recent article you put out about a number of issues around sort of AI, the capex boom, the spend you make a great point that, if anything, the AI capex boom is actually getting narrower. It\u2019s not broadening out. We are seeing more concentration in the indices as it continues afoot from the really, really giant hyperscalers and semiconductor shares.<\/p>\n
IZAK ODENDAAL: Yes. It is really the semiconductor shares that have performed phenomenally well. And now you have a company like Micron \u2013 which I think most South African investors have never heard of. Suddenly it\u2019s worth more than $1\u00a0trillion.<\/p>\n
And so yes, we\u2019ve seen this divergence this year or, let\u2019s say, over the last couple of months, between the semiconductor side \u2013 let\u2019s call it the hardware side \u2013 versus the software side.<\/p>\n
And what you\u2019re seeing is essentially, I think, the market saying that on the software side, there\u2019s actually a risk that AI could disrupt some of these business models \u2013 whereas in the past, of course, hardware and software kind of moved together.<\/p>\n
The best place you can see it actually is just in the performance of emerging markets. If you look at the absolute flying stock exchanges of Taiwan and South Korea \u2013 where of course, most of the chip manufacturing is done \u2013 it is just phenomenal.<\/p>\n
Read:
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High volatility ruins the mood for investors
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SIMON BROWN: Yes. South Korea in dollars more than doubled this year. And Micron a 10-bagger in 12 months. And, to your point, I had never heard of Micron until about two or three weeks ago when it broke the trillion-dollar market cap.<\/p>\n
You make the point; this is not a 1990s-style bubble in the narrow sense. There is profit here. These companies are making a fortune. SK\u00a0Hynix, Samsung, Micron in their chip business, really are printing cash. But it is cyclical, perhaps, is the important point.<\/p>\n
IZAK ODENDAAL: Well look, yes. It\u2019s definitely not a bubble or a valuation bubble because, as you say, these companies are very profitable. The bubble might be in the earnings of these companies.<\/p>\n
It might be that two or three years from now the data centre build out slows, the demand for semiconductors either declines or just peters out.<\/p>\n
And then the prices have to come down to earth.<\/p>\n
The margins of some of these companies are phenomenal, and that obviously is going to invite competition. As you say, historically semiconductors have been an extremely cyclical industry precisely because these kinds of demand and supply cycles are not always in whack. And then you end up with these big price cycles.<\/p>\n
Read:
What the gold and AI booms mean for investors
Mag 7\u2019s growth outpacing the S&P 500<\/p>\n
SIMON BROWN: Absolutely. And we\u2019re also seeing \u2013 I hadn\u2019t thought around this part of it \u2013 you make a really great point around supply chain and the concentration in that. You\u2019ve mentioned Taiwan, South Korea. That\u2019s where we\u2019re getting our chips from.<\/p>\n
Helium is coming out of Qatar. ASML is the only group making those photolithography machines that everyone needs. There is a fairly significant concentration. And of course, this ultimately potentially gets political. We\u2019ve seen the US CHIPS Act; we\u2019ve seen potential China export bans. We\u2019ve seen US bans on Nvidia chips. We\u2019ve seen Intel stakes.<\/p>\n
This starts to get quite geopolitical at the same time.<\/p>\n
Read: Taiwan market cap tops $4trn on AI boom, overtaking UK<\/p>\n
IZAK ODENDAAL: Yes, it\u2019s interesting if you think about it. In the last 70 years geopolitics has been driven by oil. I think it\u2019s safe to say that over the next decade or so geopolitics could be driven by chips.<\/p>\n
Indeed there\u2019s a great book by Chris Miller called \u2018Chip War\u2019, which kind of gets into all these details and all these countries trying to secure their own supply chains because it is a massively concentrated industry.<\/p>\n
And there are very obvious chokepoints in this whole supply chain.<\/p>\n
SIMON BROWN: And then for the investors out there diversification is always the way to sort of manage this. But that diversification perhaps in some ways is becoming harder than it looks. Maybe not so much for South Africans.<\/p>\n
But if you have to diversify away from the US, you\u2019ve a nice EM fund. And of course that EM fund is now probably a quarter, a third, and a half South Korea.<\/p>\n
IZAK ODENDAAL: Yes, I think \u00a0the kind of underlying risk here is that the AI theme is driving the US market, is driving the EM market, as you say.<\/p>\n
There\u2019s a big, big slice of it now spilling over into corporate bond markets. It\u2019s driving a lot of economic activity in the US \u2013 the data centre buildout. That\u2019s all good and well while it lasts and no one knows how long it lasts.<\/p>\n
All of these things are still up in the air \u2013whether all these business models turn out to be profitable. There are just too many questions around AI. But obviously the more concentrated the whole market ecosystem becomes, as you say, it is more difficult to diversify yourself into areas that are not directly exposed to AI.<\/p>\n
Read:
Africa startups turn inward as US AI boom drains venture capital
Wall Street is searching for AI winners across emerging markets<\/p>\n
SIMON BROWN: And, if anything, there\u2019s concentration. This mad rush to AI actually gets more high risk. I\u2019m talking now of the mega IPOs. We\u2019ve got SpaceX next week. We\u2019ve got Anthropic filed confidentially, SpaceX probably around $2\u00a0trillion. Anthropic around $1 trillion. OpenAI won\u2019t be far behind. That\u2019s going to be another trillion-plus.<\/p>\n
We\u2019re nowhere near the end days of this. This is still ratcheting up.<\/p>\n
IZAK ODENDAAL: Yes. And those IPOs I think will just drive further excitement and potentially keep this growing.<\/p>\n
If you look back historically, though, often the big blockbuster IPO has been near the top of the cycle. I\u2019m not suggesting that that is the case now. I\u2019m saying that\u2019s been the case historically, because obviously that\u2019s the best time to list.<\/p>\n
The best time to invest is when investors are clamouring for your shares and they\u2019re willing to pay huge amounts of money to get hold of your shares. So I think that is another thing to bear in mind. I\u2019m not calling the top. I\u2019m just saying this is kind of behaviour that you get closer to the top and the bottom of the cycle.<\/p>\n
Read:
Nokia\u2019s 140% rally turns AI comeback into valuation puzzle
Nvidia rival Cerebras seeks to raise $3.5bn in US IPO
China will open its market to AI chips from the US, Nvidia\u2019s CEO says<\/p>\n
And of course, the other problem for investors is that, whereas with something like Nvidia we\u2019ve benefited as it has \u00a0grown massively with these IPOs, a lot of the growth has taken place in private hands.<\/p>\n
And so we, as public investors\u00a0 are maybe not going to get the full benefit of that.<\/p>\n
SIMON BROWN: That\u2019s actually a great point. Nvidia \u2013 you could have bought it when it was a $100\u00a0million market cap. It\u2019s now, you know, $5.5\u00a0trillion. These mega IPOs you are buying at already $1\u00a0trillion to $2\u00a0trillion. Most of that profit has gone to the private markets.<\/p>\n
We\u2019ll leave it there. That\u2019s Izak Odendaal, Old Mutual Wealth investment strategist. Appreciate the early morning time.<\/p>\n
#Semiconductor #giants #powering #revolution<\/p>\n","protected":false},"excerpt":{"rendered":"
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