Global Equity Spotlight Episode 12

Hello everyone and welcome back to Global Equity Spotlight, a series where we delve into interesting topics affecting equity markets. Today I have Cornelius and Jacques with me, thank you guys for being here. So let’s kick off.

Could we maybe spend some time unpacking what we’re seeing developing with the software names and the semiconductor names? We’ve seen a severe sell-off this year continuing with the software names. Just after COVID, these stocks were flying high and the ratings got very expensive. Since then, valuations have drifted down to more normal levels, but recently, with the launch of Anthropic Claude’s coding products and Codecs from ChatGPT, the market is now starting to price in that these companies will really struggle to grow user base. Key pricing, maybe margin pressure, because it’s now very easy to code your own software and people are expecting much more competition for the incumbents as well as enterprises and households, I suppose, coding their own software and therefore less demand for the incumbents’ products.

And the valuations have now come off very sharply. And if you look at the hedge fund positioning, there’s been a sharp increase in the overweight and long positions in semiconductor names, and then the positioning in software names has completely collapsed because these guys need to manage volatility very closely and they just can’t take the risk with these names. So there’s been a bit of a capitulation in ownership of these names, which has accentuated the moves down. So the gap between the hardware—the pick and shovel players—and the software names—the people that are supposed to use these products—have become massive. Brilliant, thank you.

And maybe following on from that, Jacques, what are we seeing with regards to the broader AI cycle? So we’ve seen quite a few circular transactions and related party transactions with customers and suppliers investing into each other’s businesses. This has attracted a lot of capital with the likes of xAI and Anthropic raising capital to fuel the spend. And of course, without these investments, the buildout would have been slower. In terms of the hyperscalers, we’ve seen them growing their capex budgets by more than 50% over the last two years, and they’re projected to grow by another 50%—just looking at Google doubling their capex budget.

And this, of course, secures demand for the US chips and their semiconductor equipment. The demand for the latest chips from the US hyperscalers is, of course, going to continue because the US is energy constrained. They haven’t added energy capacity to the economy for the last two decades, and they’re not going to buy Chinese chips. So the demand outlook for the semi equipment looks fairly robust at least for the next year.

Brilliant, thank you Jacques. This seems like a fairly dynamic space and I’m sure it’ll bring a lot of opportunities for the Global Equity Fund in the next few months. To the audience, thank you so much for tuning in and look forward to seeing you next time. Thanks so much.