Posts tagged: updated

Monday 18th of March 2024

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Why nobody wants to admit we could be in a new bull market

Last year saw very strong moves up in equity markets globally. This year has started very positively too, with global equities in USD terms up +8% year-to-date. The US economy remains robust, with inflation largely under control, while Europe and China are showing green shoots of an economic improvement this year. This looks and smells like an equity bull market cycle starting to get underway. So why are so few willing take this view?

This reluctance could be attributed to a collective psychological hangover from recent tumultuous events, most notably the pandemic and subsequent inflation scares. Investors, much like individuals experiencing Stockholm Syndrome, have developed a paradoxical attachment to the negativity and pessimism bred by these crises, leading to an inability to recognize or accept the emerging positive signals in the market.

Stockholm Syndrome, originally identified in hostages who developed a psychological bond with their captors, can metaphorically describe the relationship between investors and the recent bear market conditions in 2020 and 2022.

Prolonged exposure to market volatility, catastrophic economic forecasts, and the tangible impacts of the pandemic and inflation have engendered a form of cognitive dissonance. Investors, accustomed to bracing for the worst, might now struggle to shift their mindset and acknowledge a burgeoning bull market.

The pandemic’s onset was a black swan event that triggered unprecedented global economic disruptions, leading to a steep market downturn. This period was marked by significant uncertainty, fear, and a pervasive sense of doom, which investors had to navigate. The subsequent inflation scares, fuelled by massive fiscal stimuli and disrupted supply chains, further entrenched the market’s bearish sentiment. These back-to-back crises have not only scarred the investor psyche but also reshaped investment strategies, with a heightened focus on risk aversion and capital preservation.

In the wake of such events, the market has exhibited resilience and signs of a robust recovery, indicative of a new bull market cycle. This includes strong corporate earnings reports, a rebound in consumer spending, and improvements in employment rates. However, the psychological imprint left by the recent past remains potent. Investors, conditioned to expect sudden downturns and economic distress, might be overlooking these positive indicators, their perceptions clouded by the residual fear of instability.

This hesitancy to embrace the potential of a new bull market could also be reinforced by a pervasive media narrative that continues to focus on risks and uncertainties, echoing the trauma of recent years. Such narratives can perpetuate a collective hesitancy to acknowledge the changing tide, as they keep the trauma and fear of recent market crashes fresh in the minds of investors.

Moreover, the concept of “once bitten, twice shy” is particularly pertinent here. Having been through severe market upheavals, investors might be overly cautious, interpreting any market positivity with scepticism. This wariness, while protective, can also blind them to the unfolding reality of a market on the upswing, leading to missed opportunities and a failure to recalibrate their investment strategies in line with a burgeoning bull market.

The collective psyche of investors, still marred by the scars of the pandemic and inflation scares, might be experiencing a form of Stockholm Syndrome, where the fear of returning to a state of crisis overshadows the rational evaluation of current market conditions.

Recognizing and overcoming this psychological barrier is crucial for investors to align with the market’s reality and capitalize on the opportunities of a new bull market cycle.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 12th of March 2024

The Indian economy, buoyed by a combination of robust macroeconomic fundamentals, strategic reforms, and a burgeoning digital ecosystem, stands as a beacon of growth and resilience in the global landscape. With its rapid GDP growth, India is projected to be one of the world’s fastest-growing major economies. This growth is underpinned by a stable inflation rate, controlled fiscal deficit, and a strong focus on sustainable development.

A key strength of the Indian economy is its demographic dividend, characterized by a young, increasingly tech-savvy population that is driving consumption and fostering a vibrant startup ecosystem. India’s leap in digital innovation, particularly in fintech, e-commerce, and IT services, has not only streamlined domestic economic activities but also significantly boosted its export potential.

The government’s proactive approach, through initiatives like Make in India, Digital India, and recent reforms in labour and agriculture, has enhanced the business environment, attracting foreign investment, and encouraging self-reliance.

The Indian and Chinese economies, both pivotal to the global economic landscape, present a study in contrasts, especially when considering their current outlooks and inherent strengths.

India’s economy, characterized by its robust growth, is buoyed by its youthful demographics, burgeoning startup ecosystem, and strong digital infrastructure. The country’s emphasis on digitalisation, policy reforms, and infrastructure development has spurred domestic growth and attracted foreign investments. India’s growth is increasingly driven by internal consumption, technological advancements, and a shift towards manufacturing and services, which diversify its economic base and enhance resilience.

Conversely, China’s economy, once the indisputable powerhouse of global growth, faces mounting challenges. The previous model of export-led, investment-heavy growth has encountered significant headwinds. Recent years have seen the Chinese government grappling with issues like an aging population, rising debt levels, and geopolitical tensions that have strained trade relationships. Moreover, regulatory crackdowns on various sectors, including technology and real estate, have introduced additional uncertainties, impacting investor confidence and economic stability.

While China’s economy benefits from its massive manufacturing base, infrastructure, and technological advancements, its current outlook is clouded by these structural challenges, potentially hampering its long-term growth prospects. In contrast, India’s economy, with its focus on reforms, demographic advantages, and a burgeoning digital economy, exhibits a more optimistic growth outlook, despite its own set of challenges, including the need for job creation, infrastructure development, and financial sector reforms.

Comparing India’s current economy with China’s economy in the early 2000s offers a fascinating glimpse into the trajectories of two burgeoning economic powerhouses, each at different stages of their development journeys. India today looks a lot like China did in the early 2000s, on the cusp of a prolonged period of strong economic growth and rise to becoming a major global economic powerhouse.

India’s stock market has taken note. It is one of the best performing markets in the world. Alongside the US market, it is one of the only major markets to have seen a consistent bull market run. Given the strong future prospects for its economy, Indian stocks may be a good long-term play on emerging market growth and a way to diversify out of China exposure.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Lunes 4 de Marzo del 2024

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What does this mean for investors?

In the early weeks of Russia’s invasion of Ukraine in early 2022, it quickly became clear the Russian military would fail to achieve its objective of a quick victory. Much to the surprise of Western political leaders and media, the Ukrainian Army repelled the attempt to take Kiev, inflicting significant casualties on the Russian advance and eroding much of its capacity to make significant advances elsewhere in the country. Ukraine had achieved stunning tactical successes on the battlefield, with the help of belated Western support in the form of sporadic supplies of armaments and intelligence.

Western politicians and journalists were quick to write off the Russian military as a spent force. Ukraine’s successful counteroffensive in September 2022 entrenched this view, which led to an even more optimistic consensus emerging of a swift and imminent Ukrainian victory in the war.

What many in the West made the mistake of doing was to confuse a tactical Russian defeat with a strategic Russian defeat. So long as a country has the will to continue fighting and the capacity to reconstitute its military force via its industrial base, then it has not been defeated strategically.

The one thing Russia’s political and military leadership got right during this period was to acknowledge that this would be a long and drawn-out war. Their response to Ukraine’s unexpected victories on the battlefield in 2022 was to gear up the Russian economy and population for a major war. Mobilisation of civilian conscripts, major increases in defence spending, and a re-gearing of industry towards the manufacture of war materiel was ordered by Vladimir Putin.

But this response by Russia would take time to bear fruit. New recruits take time to train, new tanks and fighter jets take time to build. It would be at least a year before any of these emergency measures would have an impact on the battlefield in Ukraine.

This was a crucial moment for the West. There was a window of opportunity to press home Ukraine’s advantage and flood the country with armaments, provide training at scale for its military, and give Ukraine the capacity to defeat Russia’s military decisively before it could reconstitute its capacity to fight.

There’s a reasonable chance that, if this strategy had been followed, the war might be over by now, and we would be discussing the benefits to global markets of peace in Eastern Europe, a peace won via a strategic defeat of Russia’s military in the fields of the Donbass and plateaus of the Crimean Peninsula.

Instead, sadly (for those of us opposed to autocracy) the West dithered. Its support for Ukraine was piecemeal, erratic, and at times contradictory. Little was done to ramp up Western armaments production, likely because of the hubris and overconfident conclusions made in Western capitals about the implications of Russia’s temporary tactical defeats on the battlefield. The West was complacent. It arguably still is.

This complacency led to a missed opportunity to make the Ukraine War a short one. But that opportunity has passed. Russia has now reconstituted its forces, and then some. China, Iran, and North Korea have supplied significant resources to bolster Russia’s capacities to fight, meanwhile its mobilisation of people and industry has had 18-months to deliver. Today, it is estimated Russia has a force of 500,000 inside Ukraine, this is more than double the 190,000 personnel who launched the initial invasion in 2022. What’s more they have learned how to fight a modern conflict and adapt to Ukrainian tactics and Western weapons systems.

Russia likely won’t be losing this war any time soon

As such, investors should be prepared for a long war in Eastern Europe. This likely means some exposure to Western domiciled defence stocks may make sense. The slow Western response means much of the increase in spending on defence is still to come, and this will benefit those companies. This also means investors should consider an overweight US and emerging market bias, underweight Europe, in stocks. Until the situation on the ground changes significantly, this may be an appropriate portfolio approach for the foreseeable future.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 4th of March 2024

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The answer might be better than many think...

It’s not uncommon when reading financial news and economic research, whether in mainstream publications or more specialist papers, to see references to the ‘economic cycle’, otherwise known as the ‘business cycle’. These interchangeable terms refer to a fundamental aspect of modern economies, namely, their cyclicality.

What do we mean by cyclicality?

There are cycles in nature which can help us understand the business cycle and how it works.

A cycle refers to a series of events or phenomena that recur in a regular and predictable sequence over time. This concept is widely observed in various domains such as economics, nature, and social patterns.

Examples of natural cycles include, for example, the water cycle, which involves the continuous movement of water on, above, and below the surface of the Earth, cycling through evaporation, condensation, precipitation, and runoff.

Another example of natural cycles are seasonal cycles. These are changes in weather patterns and daylight, resulting from the Earth’s tilt and orbit around the Sun, leading to seasons like spring, summer, autumn, and winter.

The ‘business cycle’ refers to the fluctuations in economic activity that an economy experiences over a period of time. It’s characterized by four main phases: expansion (where the economy grows and employment increases), peak (the highest point of economic activity, marking the end of expansion), contraction (a period of economic decline marked by falling GDP and rising unemployment), and trough (the lowest point of economic activity, marking the end of contraction before a new cycle of expansion begins).

Similar to natural cycles, the business cycle is periodic, though its duration and intensity can vary and are less predictable. Both natural and business cycles involve phases of growth and decline, and both are influenced by external factors. Natural cycles by environmental forces and the business cycle by economic policies, consumer behaviour, and global events.

Additionally, just as natural ecosystems adjust to the cyclical changes in their environment, economies adapt to the phases of the business cycle through adjustments in monetary and fiscal policies, business strategies, and consumer spending behaviours. This adaptability highlights a resilience inherent in both natural and economic systems, allowing them to endure through various phases of their respective cycles.

Conventional wisdom suggests that today we are in the late stage of the business cycle, driven by extended market rallies, peak employment, and signs of inflationary pressure, typical late-cycle indicators.

However, this perspective may overlook the unique economic reset triggered by the 2020 recession. That downturn was profound, reshaping economic landscapes and resetting the cycle clock in ways that traditional models might not fully capture.

Consider this: the rapid and robust policy responses to the 2020 downturn, including unprecedented fiscal stimulus and accommodative monetary policies, have not only cushioned the economy but also laid the groundwork for a new expansion phase. The recovery has been uneven, yes, but it’s important to recognise the foundational reset that occurred.

The job market, while strong, is still recalibrating from the pandemic’s disruptions, suggesting more room for growth before hitting the constraints typical of late-cycle phases. Additionally, many sectors are still in the early stages of leveraging technological advancements accelerated by pandemic conditions, indicating potential for new growth trajectories.

Moreover, the inflation we’re witnessing could likely be more reflective of the transitory supply chain adjustments caused by the pandemic rather than entrenched, demand-driven inflation typical of late-cycle stages.

Therefore, when considering the 2020 recession as a hard reset, it’s plausible to argue we’re witnessing the early innings of a new business cycle, characterised by growth opportunities that astute advisors can harness for forward-thinking investment strategies.

If this view is correct, that we’re in the early stage of a new business cycle after the 2020 reset, equity investors stand to benefit from an expanding economy that boosts corporate earnings and broadens market opportunities.

This phase typically sees sectors like technology and consumer discretionary thrive, offering attractive growth prospects. Equities become more appealing if interest rates decline, especially when compared to bonds. Investors might lean towards a more aggressive portfolio strategy in this case, favouring growth-oriented stocks.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 19th of February 2024

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At time of writing, 379 out of the 500 companies which make up the S&P 500 Index have reported their quarterly earnings results. While we still have some way to go before this corporate earnings season is over, a clear pattern is emerging.

Of the companies which have reported so far for the period ended December 31st, well over half (55%) reported revenues ahead of expectations, while 78% came in with earnings (profits) which were above the consensus expectations for the period. Out of 11 major sectors in the economy which Bloomberg splits stocks into, 9 reported revenues ahead of expectations (energy and utilities missed), while 11 out of 11 sectors reported average earnings ahead of expectations.

If we look at the Nasdaq Index, it is a similar picture. Of the 100 stocks in the index, 65 have reported. Of those companies, 58% have reported revenues ahead of consensus expectations for the period, and 82% came in with profits above estimates. The average earnings growth for the stocks in this index was +27% YoY.

Last year was characterised by corporate earnings in the US beating expectations consistently through the year and subsequently the equity market delivered very strong price performance.

Earnings are as fundamental as it gets for stocks. If they do well, all else equal, equity prices should do well.
While one-third of companies still are yet to report, we have enough data now with two-thirds of listed companies having reported, to take the view that this looks likely to be yet another very strong earnings season for US stocks.

What is more remarkable is that last year’s strong earnings performance had led to a rise in forecasts. So, the bar for a ‘beat’ on expectations for this earnings season had been rising all through 2023. Yet results have still come in ahead of those raised expectations. This likely will precipitate increases in forecasts for corporate earnings through the rest of 2024.

One of the best indicators for short-term performance in equities is the direction of travel of earnings estimates. If earnings estimates start to come down, that is often a good predictor of short-term weakness in share prices (on average). And vice versa. When there is a period of earnings estimates rising across a sector, on an entire stock index, that is a good indicator of positive short-term price action.

Last year was a solid year for US stocks beating expectations in earnings, leading to rises in earnings forecasts. And US stocks did what last year? They went up… a lot!

Sometimes in investing the answer is easier than many would have you believe. Now appears to us to be one of those moments. Earnings are better than expected, forecasts are rising, and stocks have had a good January and February. If this corporate earnings performance continues, they are likely to have a good year.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 12th of February

One of the things you learn when joining the world of professional investing, as an eager junior analyst, is it has its own language. Phrases, obscure references to past market events, abbreviations. One of the first things to master is the lexicon of investing so you can understand what everyone is talking about.

One phrase used often is ‘apples-to-apples’. This refers to making useful comparisons between different things. In investing this often means comparing data or investment metrics. When comparing two things on a set of metrics, you want the contrast to make sense, to tell you something useful. To do this you need to be comparing two things which share enough relevance for the comparison to make sense.

Let’s use an example. If we wanted to compare sports players with one another and we decided to use the metric of ‘distance run’, this could tell us something useful about the relative effort and intensity of the players we are comparing. But imagine we dig into the data and realise that some players are tennis players, while others are football players. Is this an ‘apples-to-apples’ comparison?

The answer, from the context of using the ‘distance run’ metric would be ‘no’. This is because tennis and football are very different sports and so using ‘distance run’ would unfairly bias towards football players who, by the nature of their sport, must run much further than a tennis player over a set period. If we were only comparing football players with one another, or tennis players to each other, then we could use ‘distance run’ as useful metric to compare players, that would be an apples-to-apples comparison and tell us something useful.

This is an important concept for investors when looking at individual companies to invest in.
Often the financial media will make over-simplifications which sometimes go mainstream and become consensus. One recent example is the ‘Magnificent 7’. Last year, seven of the largest US listed stocks contributed to most of the stock market’s performance. This group of seven large cap ‘tech’ businesses (Amazon, Meta, Alphabet, Microsoft, Apple, Tesla, Nvidia) are talked about as though they represent a homogenous group of interchangeable technology stocks, all delivering the same thing.

This, we would argue, is not ‘apples-to-apples’. What the media has dubbed the ‘Magnificent 7’ are not interchangeable with each other, they have very different characteristics. Some are now very expensive stocks and we think offer poor risk-reward for investors from here, while others are attractively valued and make good investment propositions today. The cheapest of the Magnificent 7 trades on a forward valuation multiple less than half that of the most expensive. If we compare growth rates to valuations, the difference is even wider, the cheapest is six times cheaper than the most expensive.

The products and services these companies offer are also very different. Meta and Alphabet are, at heart, advertising businesses. Apple is an electronics hardware company. Microsoft and Amazon are cloud computing giants, while Amazon also moonlights as the world’s largest retail ecommerce business. Nvidia designs computer chips. Tesla builds cars. These are very different businesses with different factors driving revenue growth, profitability, and returns on capital.

Beware oversimplifications, especially when they are unhelpful. The Magnificent 7 are not the same, they are very different businesses, with very different outlooks as investments. Treating them as one homogenous group is unhelpful and should be avoided. That doesn’t mean investors should avoid investing in any of them, in fact we think some of these companies could make very good long-term investments (but not all of them).

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 10th of October 2023

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There have been big moves in long-term interest rates in recent weeks and there is no consensus on what is causing this spike. In September the 10-year US Treasury yield increased by 0.5%, which is a big one month move given that the Fed appears to have stopped raising interest rates for now and inflation is declining.

Long-term rates typically respond positively to expectations of rate rises and inflation expectations, in other words, if inflation is rising and interest rates are going up, you would expect the bond market to respond with higher yields on longer dated debt to reflect higher expectations of future rates and inflation levels. Last month’s rise in longer term yields is therefore especially interesting for us to understand, given the opposite has been happening with interest rates (rate rises on pause) and inflation (coming down).

This increase in longer dated yields has had a negative short-term impact on equity markets. Higher yields in 10-year US treasuries makes them more attractive as an investment and so encourages more capital to flow into those securities, at the expense of equities and other asset classes. Valuations of stocks are also reliant on applying a ‘discount’ rate to future cash flows. Higher discount rates reduce the present value of future cash flows and so, in theory at least, should result in a lower share price today. September was a weak month for equity prices.

An important question to ask is: why is this happening now in bond markets?

One explanation might be that the bond market is changing its expectations as to what future interest rates will be. If expectations for what rates will be in the future rise, this should translate into higher longer-term yields. This explanation for the recent spike in long-term yields is attractive, given how simple it is, but it is also in our view an over-simplification. There is little new information to support a sudden change in expectations in bond markets about where future rates will be.

Another explanation would be a jump-up in future expectations for inflation. If markets think that future rates of inflation will be higher than previously expected, this should be reflected in higher longer-term yields. Again, this is an attractive explanation, but this isn’t supported by any new information on inflation, which continues to decline.

The final explanation is the one we think is most interesting. Perhaps, the bond market is catching up to where the equity market was earlier this year. If economic growth rates in the future end up being higher than expected, you might expect longer-term yields to rise to reflect this. Markets discount future expectations so if, under the surface, bond market expectations are becoming more bullish about future rates of economic growth, you would expect to see the move up in longer-term yields we have seen recently.

This fits with our view that the underlying economy may be in better shape than many people think, inflation may be in the rear-view mirror, interest rates likely will come back down and real rates of economic growth will accelerate. New innovative technologies like AI could further support improvements in economic productivity and as such, equity markets could be on the cusp of a strong bull market up-cycle. This view is far from the consensus right now, but as we have previously written, we see interesting parallels between this current inflation and economic cycle to that of the late 1940s, characterised by a pattern of high inflation followed by lower inflation and a strong equity market rally. Short-term bouts of market weakness, if we are right, would be an opportunity to buy.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 2nd of October 2023

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The hype around artificial intelligence (AI) this year has propelled the share prices of many related companies to all-time highs, epitomised by the more than +200% increase in Nvidia’s market valuation since January. The release to the paying public of ChatGPT and other large language models, which exhibit impressive capabilities, is feeding a reassessment of how soon artificial intelligence could revolutionise the global economy.

We are believers in the long-term prospects for this technology to change the world. There are already clear user cases for language models to support academic research, coding projects, and customer support functions for businesses across myriad industries.

But the true revolution will come when this technology impacts the daily lives of everyone. This is true of any major technological upheaval to society and the economy. The most recent examples have been the internet and then smartphone adoption. Initially these were technologies limited to small numbers of users, but as the formats of each matured and costs declined, making them accessible to all, adoption skyrocketed. The internet and smartphones are now, in developed economies and increasingly in developing economies too, part of everyday life for all people.

For AI to change the world to the same extent, it will need to be integrated into the lives of all people, every day. For this to happen a mature and accessible form factor must become widely adopted by users. Currently we are not there yet. To access a large language model today, you would need to log-in to an account or a search engine with an embedded function, and type in requests to the model. Although a major step change from where we were with AI just 12 months ago, this is still not a mature form factor which will seamlessly merge with the lived experiences of people throughout their day.

Recent announcements from some of the leading technology companies in AI give us a clue as to what mature AI products will look like in the near future. OpenAI, creators of ChatGPT, have announced the upcoming release of a version of the AI tool which can understand voice commands and respond audibly, removing the need to type commands and read text responses. Early feedback from test users is impressive.

Last week Meta, owner of Facebook, Instagram, and WhatsApp, announced it will be launching an augmented reality device that users can wear and which will look like a normal pair of sunglasses or eyeglasses. The interesting part of the announcement is that Meta plans to embed a version of its own AI into each device, which will allow users when wearing the glasses to interact with their surroundings and directly with the AI. This is a major step change from the current process of interacting with AI via a chat function in an app, this is true everyday integration of AI with users lived experience.

The future of AI could be coming much sooner than people realise, and in a form factor you can wear every day.

As these technologies mature, demand for the infrastructure to facilitate the mass adoption of AI will grow significantly. From the standpoint of investors, we continue to believe that the best way to play this global structural theme is to own the companies supplying the ‘picks and shovels’, in other words, the suppliers of the infrastructure, products, and services needed to facilitate the AI revolution… a revolution coming soon to a pair of sunglasses near you.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 25th of September 2023

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Uranium commodity and financial markets...

Most commodities have seen major declines in price this year, following a spike in prices in 2022. Oil prices are down 6% year-to-date in 2023, while natural gas prices in Europe are down more than 80%. Aluminium, zinc, palladium, in fact virtually every commodity is trading on prices today well below peaks form last year.

One which stands out is uranium. The commodity used to power nuclear power stations is trading on spot prices close to the highest in more than a decade. Over the past twelve months the price of uranium has risen 18%, while since 2017 the price has climbed by more than 130%. 

What has been driving this, is a global undersupply of uranium feeding the world’s growing fleet of nuclear reactors. Total demand exceeds supply, and has done for several years, with the difference made up by inventories held by large utilities. As demand rises and supply remains stable, this deficit in supply is growing and putting upward pressure on the price of the commodity.

Demand for uranium, unlike most other commodities, has very little to do with the macro economy. While demand for copper or crude oil will often fall during an economic slowdown, this is not the case for uranium. The large nuclear power stations which use uranium as fuel typically provide baseload electricity for grids, which means they run at high rates of capacity 24 hours a day, seven days a week. Other sources of electricity, like gas fired power, are used to flex up and down to meet fluctuating electricity demand on a typical grid. 

So, while during a recession electricity demand may fall, as overall economic activity cools, use of nuclear power will often remain stable.

Meanwhile, there has been a steady shift in attitude toward nuclear power, which has accelerated in 2022 and this year. Russia’s invasion of Ukraine and the subsequent spike in coal and natural gas prices has forced a major re-think about energy security in many countries, with more pro-nuclear policies having already been, or in the process of being, introduced. 

In addition, the needs to de-carbonise energy systems and the slow build-out of renewables has further shifted opinion on nuclear power as an option for energy systems in many countries. 

In many cases we have seen countries produce updated long-term plans with radical increases in nuclear power predicted for the 2030s and beyond.

In the more immediate term, there is a growing list of nuclear power stations which were scheduled for decommissioning where the closure has been delayed or cancelled. This is adding unexpected demand to uranium markets in the near-term. 

Uranium multiplication...

In the 2005-2008 period, uranium saw a 10x increase in price. As with the market today, the global market for uranium was in supply deficit and prices had steadily risen, the market became increasingly tight. Then an unexpected interruption to supplies from one large mine in Canada triggered a wave of buying from utilities running nuclear power stations. The cost of uranium fuel to power a nuclear plant is very low relative to the power output and as such, many of these buyers were much more concerned with securing supplies than how much they paid for the fuel. 

Today’s market for uranium has many similar characteristics and we have recently seen several unexpected supply disruptions. A military coup in Niger, home to 5% of global uranium output, has interrupted exports from the country. A large Canadian uranium miner has also announced lower than expected production from one of its largest mines following unexpected issues with that location. 

History may not repeat but sometimes it rhymes.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 14th of August 2023

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How does the butterfly effect link to the markets?

It is rare in any sector of the economy for talks between a trade union and employers to have global ramifications. But that is exactly what happened last week.

Proposed industrial action by trade unions and their members at liquified natural gas (LNG) sites in Western Australia, representing 10% of global LNG exports, sent natural gas prices in Europe up +40% in just one day. Much of Western Europe relies on natural gas for a high proportion of electricity production, as well as many industrial production processes and (during winter) for heating. A spike up in price of this magnitude has major implications if sustained.

Outside of Europe prices rose too. In Asia, LNG futures rose +7% last Thursday, while broader energy prices have moved up too.

While much of Australia’s LNG supplies go direct to Asia, the prospect of tighter supplies there means many Asian LNG buyers will be looking to compete with European buyers for supplies out of North America and the Middle East.

The Butterfly Effect is an idea in which very small changes in the state of initial conditions in a system can have large nonlinear effects in a later state on the entire system. Mathematician and meteorologist Edward Norton Lorenz used the example of a butterfly flapping its wings resulting in a tornado some weeks later.

In the global commodity complex, an effect much like the butterfly effect can have global implications, especially when those markets are tight, i.e., where the spare capacity of the supply side to respond to high prices is limited.

Since the Russian invasion of Ukraine, global energy markets have become tighter. And these markets were already becoming tighter in the lead up to the war, the conflict has only exacerbated the problem. Years of low investment in new production capacity by fossil fuel producers has meant that the ability of the supply side to respond with higher production has become reduced steadily over time.

We have warned previously that tight markets in an unstable geopolitical climate and with high inflation could result in lurches back into rapid rises in commodity prices which surprise markets.

This is exactly what happened last week. Unions representing just 700 workers in Australia resulted in European and Asian energy prices rising substantially. This is a strong indicator of tight markets and that we could see further spikes up in prices for commodities, as we saw in 2022.

Inflation picks up...

This raises the prospect of inflation levels picking back up due to commodity prices pushing up broader price levels. Last week’s price spike is not enough, on its own, to cause this, but is indicative of the state of energy and commodity markets today, namely one of tight supplies across many major commodities, a world where the risk of interruptions to supplies is high, and where demand for some commodities is rising structurally (driven by emerging market demand and the needs of climate change mitigation policies).

This sets us up for continued lurches up in prices to very high levels in the short-term. The timing of these lurches up in prices is hard (arguably impossible) to predict, but we can say with more certainty that the probability of these lurches up in price occurring is higher.

When we look at some of the stocks (energy suppliers) with positive exposure to these price rises, they often trade on very low valuation multiples. This is why we maintain long investment positions in some of these names. With limited downside to share prices given the already low valuations, we have exposure to the positive side of higher energy prices… higher short-term profits and dividends!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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