Source: Capital Group, FactSet, MSCI, Standard & Poor’s

Notably, over the next two years US earnings are expected to continue to outgrow developed market peers, with earnings forecast to increase 27%. This compares to the 16% growth expected in Europe and 20% in Japan. Emerging markets are set to significantly outpace this growth, albeit off a low base.

The recent performance of the S&P 500 Index and in particular the Magnificent 7 has garnered much attention. How can these drastic moves be sustainable? The answer is continued earnings growth. Nvidia is a good example. The share is up over 200% over the last year. However, just as importantly, quarterly earnings are up over 600% over the last 4 quarters. Going forward, the question again lies in whether Nvidia will be able to sustain this earnings growth. As long-term investors, this is where the vast majority of our research effort is directed towards. In Nvidia’s case, it is encouraging that earnings are forecasted to grow over 200% over the next three years.

At High Street, we ultimately aim to position ourselves to take advantage of long-term trends, investing in companies that are set to benefit disproportionately from such trends. These companies exhibit robust fundamentals, with dominant market positions and durable competitive advantages. We are comfortable in holding these companies for multiple years and this long-term view can help put the short-term noise into perspective.

The Bad: Watts Next for AI?

Artificial intelligence (AI) is currently the hottest topic being discussed by companies and investors alike. Although much has been spoken about how it will revolutionise almost every industry, far less focus has been placed on its potential environmental impact. AI is incredibly energy-intensive, primarily due to the vast amount of data that the models are trained on, as well as the volume of requests made to the AI by users. These factors are further amplified by the complexity of the models, with more advanced programmes requiring a greater amount of power. According to Forbes, it is estimated that the daily requests sent to ChatGPT amount to half a million kilowatts of electricity, equivalent to the daily power use of nearly 180,000 US households.

Moreover, the rapidly growing AI industry is also heavily reliant on water, Earth’s most precious resource. The massive energy consumption of AI servers creates a significant amount of heat, which needs to be quickly dissipated through cooling systems that are fed by fresh water. This need for water further exacerbates the industry’s growing environmental footprint. Microsoft consumed around 22bn litres of water in 2022, an increase of 34% over the year before, while Google’s usage grew by 22%. A single conversation with ChatGPT uses about a 500ml bottle’s worth of water. With 200 million requests being sent through daily, an extremely substantial amount of water is required.

Source: Masanet et al. (2020), Cisco, IEA, Goldman Sachs Research

Positively, the companies involved in AI have recognised their role in pursuing these new technologies responsibly. Microsoft has committed to being “water positive” by 2030, which means they will replenish more water than they use. Both Microsoft and Amazon have been exploring the use of next-generation nuclear reactors to power their data centres, with Amazon purchasing a nuclear-powered data centre in Pennsylvania earlier this year. Nuclear is considered a clean non-renewable source of energy, aiding Big Tech in achieving their sustainability goals.

As AI technology is still in its infancy, we can expect a significant amount of innovation to occur within the energy sector, as industry players grapple with the potential of heightened demand in the near future. In March’s newsletter, we wrote that we expect copper to have a very strong growth profile because of rising demand from the energy transition. We believe that this, alongside the energy consumption associated with AI, will continue to make copper an attractive commodity to hold. We own mining companies with significant copper assets in our various funds, namely BHP Group, Glencore, and Teck Resources.

& A Walk Along the High Street – Part Four: A Solution to Externalise Retirement Savings Beyond South African Shores

Following the conclusion of ‘Meet the Managers,’ our ‘A Walk Along the High Street’ campaign continues with its penultimate edition. In this feature, we highlight the High Street Balanced Prescient Fund, exploring its mandate of maximising offshore exposure while adhering to Regulation 28 of the Pension Funds Act. We delve into how the Fund sets itself apart from its peers, its track record of performance, and its unique composition that offers diversification beyond a traditional model portfolio, with low correlation to typical Regulation 28 funds. To read the article, please click on the link below.

A Walk Along the High Street: Part 4

Source: High Street Asset Management