The Point

What we learned from OpenAI’s failed coup: don’t bet against capitalism

The failed coup at artificial intelligence leader OpenAI suggests investors are better off ignoring ideology and instead relying on tested market principles such as profit and self-interest.

That’s a lesson investors can take away from the astonishing episode, says Samir Mehta, who manages Pendal’s Asian equities strategy.

The ouster of CEO Sam Altman was engineered by OpenAI board members who reportedly feared that his plans for unbridled development of AI technology posed a threat to humanity.

Altman was later reinstated with the backing of major shareholder Microsoft – and the dissenting board members were replaced.

“It reminded me of when Xi Jinping came down on Chinese companies like Ant Financial and Alibaba’s founder Jack Ma,” says Mehta.

And yet capitalism continues unabated in China, points out Samir. Fast-growing Chinese fast-fashion retailers Shein and Temu are a case in point.

“Chinese and American ideologies are ostensibly diametrically opposite, but when it boils down to business there is very little difference between the two.”

Aussie equities: Three mid-cap themes that look promising

Three themes – energy, data centres and battery raw materials – provide promising opportunities in the ASX mid-cap space at the moment, argues Pendal equities PM Brenton Saunders.

In energy, short-term considerations revolve around oil prices and the geopolitical backdrop, Brenton says.

“It’s not just a function of the conflicts in Israel and Ukraine – but also how the US economy performs especially ahead of the election next year.”

Medium-term opportunities come from companies with strong positions in transition fuels such as natural gas. Longer-term opportunities are around uranium, he says.

Brenton also likes the data centre space as business demand for bandwidth and data storage grows – including via the AI theme.

“And it might be on the nose at the moment, but the demand for batteries and battery materials continues to ramp up aggressively,” he says.

“We are dealing with an oversupply of some raw materials for batteries, and of batteries themselves. But this should clear as EV penetration progresses.”

Global equities: How to navigate investing in a higher-rates world

It looks like rates are staying higher for longer.

That means investors need to rapidly rethink what has worked in recent years, argues J O Hambro senior fund manager Samir Mehta, who specialises in Asian equities.

When evaluating stocks in this environment, Samir says investors should:

• Double down on valuation as a critical investing metric
• Understand the ramifications of tighter credit on business finances
• Carefully consider the second and third-order effects of higher rates, and
• Focus on near-term cashflow generation ahead of future earnings projections

Samir is seeing the effect of higher rates show up in company reports.

For example, Korean battery-maker LG Energy Solutions recently said electric vehicle sales would slow next year due to higher rates.

“The mindset of every economic participant has to turn on its head 180 degrees,” argues Samir.

How to assess company management: four tales from Asia

For all the focus on macro-economics, the actions of management are a major factor in a company’s success.

There’s a reason why active investment managers spend so much time meeting with company execs.

Understanding a company’s leadership – and how well they are executing an appropriate strategy – is critical to successful long-term investing, says Samir Mehta, a senior Pendal PM who focuses on Asian equities.

When facing similar challenges, company managers often take different approaches – with very different results.

Samir points to Chinese restaurant chain Haidilao and camera lens maker Sunny Opticals. When both faced challenges, Haidilao successfully bunkered down and cut costs, while Sunny persisted in an expensive search for growth.

India’s Asian Paints leveraged an iconic brand, healthy cash flows and strong balance to fend off a potentially irrational new rival, while ASEAN-focused fintech SEA was drawn into a costly fight for market share.

Aussie equities outlook: two questions hold the key

THE fate of markets over the rest of 2023 largely depends on two questions: the outlook for rates and inflation, and the resilience of the Chinese economy.

That’s the view of Pendal PM Brenton Saunders, who manages Pendal MidCap Fund.

On inflation, markedly different outlooks in Australia and the US are leaving investors unsure where to turn, Brenton notes.

Australia is at least three-to-six months behind the US inflation cycle, he believes.

“In the US it feels like inflation has peaked and is making its way down – albeit more slowly than many had expected.

“But in Australia, we’re still seeing some fairly aggressive inflation in certain parts of the economy – mostly labour-related.”

Compounding that is a softer approach from the RBA compared to other OECD economies.

“We can realistically expect to see rates go higher and inflation remain an issue in Australia for a while.”

Global equities: The more AI grows, the smaller the market could be

Not surprisingly, artificial intelligence was one of the big themes in the latest US quarterly reporting.

In Asia there’s a similar level of market excitement, with Taiwanese chipmaker TSMC up 20 per cent this year for example.

But it’s divorced from reality, reckons Pendal Asian Shares PM Samir Mehta.

At TSMC, AI accounts for just 6 per cent of revenue, with the balance of sales coming from stagnant laptop and phone markets, he says.

And the technology’s very success could curtail demand, he cautions.

Enthusiastic long-term AI industry revenue forecasts are often based on growing uptake of per-user licences.

But if AI succeeds in its promise of making business more productive, companies will reduce staffing.

“The effect of raising productivity is going to mean fewer people will need that software because fewer people are employed,” Samir says.

ASX midcaps: Unearthing the potential of mineral sands

Whether rubbing sunscreen on your face, reloading your printer ink or painting a wall at home, you’re probably consuming mineral sands.

Mineral sands are old beach, river or dune sands that contain concentrations of rutile, ilmenite, zircon and monazite.

They have a variety of uses from paint and paper through to toothpaste, sun cream and ceramics – and the biggest mineral sands producer in Australia is ASX-listed Iluka Resources.

Iluka is a holding in Pendal Midcaps Fund, which focuses on the 100 biggest companies outside the ASX50 – a good hunting ground for fast-growing sectors such mineral sands and rare earths.

“Mineral sands is a steady business that Iluka has grown up doing, says Pendal equities analyst Jack Gabb.

Iluka is now building a rare earths refinery in Western Australia which would process minerals such as neodymium and dysprosium for use in electric vehicles and clean-energy generation.