Institutional investors are navigating two massive innovations, namely artificial intelligence and artificial incretins, said Jennifer O’Hara Martin, global equity portfolio specialist at T. Rowe Price, during the Canadian Investment Review‘s 2024 Global Investment Conference in April.
People tend to compare the current AI trend to the technology bubble of the 2000s and while its infrastructure is similar, in this cycle, that infrastructure is funded by the most profitable companies in the world, she said, noting it’s not a debt cycle like the tech boom of the 2000s, the shale boom or even the housing boom.
“When you’re navigating these cycles to capture those returns, you’re capturing the change and the inefficiencies of those winners and losers.”
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O’Hara Martin noted T. Rowe Price has invested in AI infrastructure and enablers, particularly the chip ecosystem, which are the direct beneficiaries of the buildout of AI. Indeed, applications such as ChatGPT run on foundational models and the infrastructure of these programs is dependent on the chip makers and their data centres.
The current infrastructure cycle is where a lot of the investment is, such as in NVIDIA Corp. “NVIDIA’s revenue is Microsoft’s main capital expenditure. At some point, Microsoft and many of these others are going to have to show monetization.”
In June 2023, experts at T. Rowe Price estimated the chip market had the potential to generate $150 billion. Six months later, the market is generating $400 billion, she said. “There’s a lot of applications being developed that are much more powerful using a [graphics processing unit] versus a [central processing unit]. And that’s coming through in a lot of different manifestations.”
As well, the mega-capital tech companies can afford the energy. “AI is incredibly energy-intensive and Google and [Amazon.com Inc.] right now are buying farmland in Pennsylvania and they are [connecting] their large data centres directly to nuclear [power plants]. They’re also buying those small reactors. If you look at AI-enabled . . . Constellation Energy, that stock [is] up 40 per cent year to date. It’s an AI beta.”
Additionally, the capital expenditures of these companies aren’t solely invested in chips and infrastructure but also in energy, which suggests the U.S. could face a power shortage in the coming years, added O’Hara Martin. These companies have achieved significant size in benchmarks largely because AI represents a sustaining innovation, she said, noting they’ve have become natural monopolies, where scale is crucial in the AI era. They require costly computational resources, talent as well as distribution capabilities and the ability to harness vast amounts of data.
Institutional investors are also eyeing the development of artificial incretins, which are glucagon-like peptide-1 agonists — a type 2 diabetes drug class that improves blood sugar control but has also resulted in weight loss for some patients. Novo Nordisk, which produces the GLP-1 drug Ozempic, has also developed Wegovy, a similar drug treatment specifically designed for weight loss.
These drugs represent a watershed development in the health-care sector, she said, noting their potential for extending plan member longevity could mean pension industry actuarial tables may need adjusting in order for plan sponsors to ensure they can meet their pension obligations.
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Indeed, these drug treatments are yielding improved health outcomes, aiding with digestion and maintenance of stable blood sugar levels as well as preventing insulin resistance that often develops in older individuals. Additionally, these drugs interact with the body, signalling it to reduce food intake and curb the need for that additional glass of wine, she said, noting the investment potential of this class of drugs is significant.
This is another large market where institutional investors can find alpha, said O’Hara Martin. “If you just think about the U.S. market, there’s 100 million obese people, [with] 50 million . . . covered by [health] insurance. We’re treating less than one per cent of those individuals right now. . . . Novo Nordisk’s revenue for [its] obesity medicine is only down [due to] capacity constraints.”
While there are some concerns about these medications, they’ve largely been disproven, said O’Hara Martin. “There is so much venture capital funding flowing into obesity drugs because we’re cracking the code on these different molecules.”
Read more coverage of the 2024 Global Investment Conference.