The Point

Elise McKay: Don’t be fooled into thinking AI has run its course

Sentiment has dipped on the US mega-tech stocks, but it would be a mistake to believe the AI theme has run its course.

That’s the view of Elise McKay, an analyst with Pendal’s Aussie equities team, who’s just returned from a US tour where she met with dozens of companies.

AI was a topic in almost every meeting, Elise says.

“AI is not a fad. Economic wobbles and geo-political uncertainty may have contributed to a recent sell-off in the Nasdaq.

“But there’s strong evidence that over the longer term generative AI will have a big impact across the business landscape.”

Today’s winners may not be the winners of the future though, Elise says.

For example, Nvidia is now an AI infrastructure winner because its chips are in high demand for resource-intensive AI training.

But there are signs market growth is shifting from training to “inferencing”, which requires less computing power.

Pendal’s weekly fixed interest wrap

Another week, another rise in yields; Australia the worst developed market

AT THE time of writing, Australian 10-year bond rates were up another 0.24% for the week – despite little hard data to explain it.

True, the Reserve Bank is expected to hike rates next week. But long bonds have underperformed short rates, which is not what you’d expect.

Interestingly, Australia was by far the worst performer among global markets. Europe was largely unchanged and the US was only 0.05% higher.

So we’re left with various possible explanations — though if truth be told, the scale of the selloff is a surprise to all.

Tim Hext: Inflation is higher. But is it ‘materially’ higher? That’s the big question

After yesterday’s strong inflation numbers, focus now turns to the RBA’s Nov 7 meeting.

The rates decision rests on the RBA’s definition of ‘materially higher’ and ‘low tolerance’, says Pendal’s head of bond strategies Tim Hext.

RBA minutes mention a “low tolerance” to upside inflation surprises. Meanwhile governor Michelle Bullock has said the board won’t hesitate to hike if there’s a “material revision” to the inflation outlook.

“What is material?,” ponders Tim.

Q4 inflation is expected at around 0.9%, leaving headline inflation at 4.3% and underlying at 4.1%, he says. That would be about 0.2% higher than the RBA’s last forecast.

We’ll get a sense of the latest forecast (due Nov 10) with the rates decision.

“At these levels there is no clear trade, since it will be line ball,” says Tim.

“If I’m pushed, I think Bullock will be keen to show her inflation-fighting credentials by putting in one hike, even though she was probably hoping today’s number would let her off the hook.”

Aussie equities: where to hunt for category winners in this economy

THE global economy has shown resilience in recent months – but there are now signs it is gradually slowing, along with consumption.

“We are moving from single-digit growth to single-digit declines,” says Pendal equities analyst Anthony Moran.

“In this environment investor mindsets change from being comfortable about resilient demand to thinking about downside risks.”

The shift has been particularly prevalent in industrials, which have underperformed other sectors, says Anthony.

“Investors don’t need to put all their money into hyper-defensives because things may not be that bad.

“Look for companies that are going to grow above their category, or are able to grow market share, particularly if they are trading at attractive valuations.”