The Point

Power-hungry AI a watch-out for equities investors

Big US tech stocks are soaring on a wave of new, advanced AI applications.

But similar to Bitcoin’s early days, excited AI investors may be overlooking the technology’s extremely  high power costs and potential associated sustainability issues, says Pendal equities analyst Elise McKay.

That puts a question mark over the industry’s prospects – and the long-term investment case, says Elise.

“Estimates are that every time you query ChatGPT, it is 300 times more expensive than a Google search.”

A Stanford study found that training OpenAI’s popular GPT-3 generative AI system contributed almost 10 times the lifetime emissions of an average car.

The newer GPT-4 model was an estimated eight times more power intensive again, she says.

Sustainable investing: Five steps to avoid greenwashing

As ESG demand grows, investors are becoming more attuned to the threat of greenwashing – misrepresentation of a product’s ethical credentials.

Here are some tips from Pendal risk and compliance manager Diana Zhou and investment analyst Elise McKay:

Aussie equities: Small business changes bring opportunity for Xero

Small businesses are under pressure to shift their accounting systems online as a global regulatory push to e-invoicing and real-time tax gathers speed, says Pendal Aussie equities analyst Elise McKay.

E-invoicing — pushed by the ATO and other regulatory bodies globally — aims to reduce security issues and fraud and speed up payments.

Elise has just returned from digital accounting platform Xero’s annual conference in the UK, where the big topic was the push to digital tax.

From 2024 British businesses and landlords with £10,000 turnover will have to report digitally, impacting some 4.2 million taxpayers.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” says Elise.

“I spoke to one UK accounting firm with more than 3000 clients who are going to have to adopt cloud accounting solutions.”

That’s good news for ASX-listed Xero, which is part of Pendal’s Focus and Horizon Aussie equities portfolios.

How ASX miners are creating opportunities for sustainable investors

The mining sector probably doesn’t spring to mind as a source of inspiration for sustainable investors.

But companies such as Fortescue, BHP and Rio are investing billions to achieve net zero carbon emissions, creating new opportunities across the mining supply chain, says Pendal Aussie equities analyst Elise McKay.

“We visited 15 different companies across the mining supply chain in Perth last week and one of the key standouts was the extent to which there’s a huge focus on getting to zero emissions,” says Elise.

“It’s a broad generalisation, but companies that tend to be the most forward-thinking in terms of ESG are typically the ones with the biggest problems to solve.”

For example, a number of investable solutions are emerging to reduce haulage emissions — pollution from big mining trucks — at mine sites.

Caterpillar (distributed locally by Westrac, owned by ASX-listed Seven Group), is testing zero-emission mining trucks due for sale by 2027.

Global equities: The hidden opportunity in Europe’s changing market

Still think of Europe as slow-growth and cyclical, dominated by banks and industrials?

Investor confidence is growing in Europe

Europe is looking attractive again compared to global peers, says J O Hambro PM Paul Wild.

After a challenging year, investment flows into European equity funds are positive again after a milder-than-expected winter and successful efforts to rebuild gas storage, says Paul.

European gas prices have fallen back below where they were before the Ukraine conflict, and plentiful supply means they are likely to stay that way for the next year or so, he says.

“In the second half of this year, many European consumers will be facing lower energy bills again.”

The EU economy is proving surprisingly resilient. Eurozone GDP numbers for Q4 were up 0.1 per cent, allaying fears of a recession.

Wild says the extent of the outflows through last year has left most investors very underweight European equities.

“Since 2016, European equity funds have lost about a third of their assets. So, it doesn’t need a sea change of flows to be significant.”

Global equities: Is Euro pessimism overdone?

Despite the headlines, investor pessimism about a continental recession seems overdone and European shares are starting to look good value, argues Pendal’s Paul Wild.

The eurozone is likely to skirt recession over the winter, says Paul.

“Fiscal policy in Europe, particularly in Germany, is having a significant turn. Germany has come out with three aid packages since the Ukraine invasion which in total equate to about 2.7 per cent of GDP.

“Unemployment in Europe is still at all-time low levels and we’re seeing reasonable consumer resilience.”

And the EU has been aggressively building gas reserves to head off shortages over winter.

“It feels like European governments have taken away the armageddon scenario,” says Paul.

The environment is ripe for a shift in investor approach back to GARP — buying “growth at a reasonable price” — which suits Europe’s weighting towards industries like pharmaceuticals, automotive, insurance and banks, he says.