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Each quarter, I do a longer outlook and review note for clients. I sometimes think an AI could summarise these notes pretty succinctly as: if the economy holds in there, risk assets are normally a good place to be. And if it doesn’t, they aren’t. Well, even though seasonally these are statistically the two toughest weeks of the year, the economy continues to hold on in there. Just this morning, we saw strong retail sales numbers from the UK. And in the US, the Atlanta Fed GDPNow estimate (which is the best real time measure of how the US economy is doing) is tracking at almost 3% – this remains above the pre-Covid average of nearer 2%.
We have also seen a recovery in the tech sector from its sell-off earlier this month on renewed optimism about AI revenues. For a while I thought ChatGPT and the like were amazing pieces of technology but it was hard to see the real killer app that would make them profitable. Now I am not so sure for a couple of reasons which are below. This comes with the caveat that it is anecdata (sample size 1) so I remain very interested in other people’s experiences but for now it is the best I have.
- I would estimate that around half of my searches now start with ChatGPT or a competitor (I normally use Google’s Gemini). As these AIs develop I only see this percentage going up. The aim is for an AI assistant to be able to book flights, restaurants or make an Amazon purchase for you. At that point, who exactly is going to use search? I am an old guy brought up on browsers and search engines. For the TikTok crowd I’d guess search volumes are falling even faster. A couple of years ago Google looked like one of the strongest business models you could imagine: more people searching meant better search results, better search results meant more people searching. Now it may be a bit like the personal ads sections in local newspapers, slowly on its way out.
- This week, Google launched NotebookLLM. You can upload pdf documents into it and it will create summaries, you can ask questions about parts of the document and it will even (amazingly) create an AI podcast where two (remarkably real sounding) “people” go back and forth discussing what is in the document. You can therefore take a lengthy company report or, say, a new piece of FCA legislation and listen to an 8-minute summary while you get a coffee. As an example, here is a discussion of my last (Q2) client quarterly review. There is room for improvement here but, equally, this technology will only keep improving. The feels like a real, usable step forward for people, like me, in the analysis business.
There are both huge threats here to existing business models (like online search) as well as huge opportunities that the existing tech giants (with all the cash and data they have available) are best placed to exploit. This makes it an interesting space to invest in but it will also make it volatile as the market continues to assess where the winners and losers are. The last couple of weeks have seen optimism return but I’d expect the volatility in prices we’ve seen this quarter to continue for a while yet.
My view remains that you have to remain invested in the large cap technology space whatever today’s valuations might look like, but it is good to balance all things AI with some duller, old world, cashflow producing businesses. Happily, there are plenty of these in the UK and UK markets continue to quietly stage a recovery. The FTSE 100 is 2% off its all-time highs and sterling is up 25% against the dollar from its Liz Truss inspired 2022 lows. The fact that valuations remain unchallenging adds to the UK’s appeal.
And if I can end with a very tenuous UK based link, my wife does occasionally read these notes. Last week she managed to cycle 974 miles across the UK in 9 days with 700 other Ride Across Britainers. In the highly unlikely event she has read this far, well done Juliet! And well done all the other successful RAB cyclists!
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
