While we are currently bullish on future applications of AI, we are also cautious as there are many “fake” beneficiaries of the phenomenon. Several stocks that rallied in 2023 had no material exposure to AI applications and we believe many companies working on AI applications may not actually see a boost to earnings.
In EM, we believe only the companies that are true enablers of AI are likely to see material earnings growth in the long run. Within the semiconductor and hardware industries, we prefer foundries, memory makers and processor designers that can make new-generation products resistant to quick commodification. We are looking for players that we believe can enable greater computation power and storage while retaining profits. Within the software and internet industries, we’re looking for the tool makers, content creators and internet platforms that we believe can lower human capital costs and increase the pace of new content generation. Within technology services, we’re looking at higher-end consulting companies with the in-house knowledge to use AI in client projects that involve more architectural design and application creation.
In our view, many stocks, even those currently positioned to benefit from AI, have rallied too much on the AI trade. Very often, valuation multiples for companies that mention AI have expanded much more than actual earnings. Instead of chasing theme-driven trades, we prefer to seek out opportunities with structural, long-lasting growth drivers that are likely to benefit from AI over the long term.
2. Argentina’s new president, Javier Milei, has proposed major structural changes to the Argentine market, including shuttering the central bank and fully dollarizing the Argentine economy (replacing the Argentine peso with the US dollar as legal tender). How does the new political landscape shape your expectations for Argentina’s economy?
It is clear to us that Argentina is headed in a radically different direction under Milei’s leadership. Just three days after Milei’s inauguration, the government announced a 50% devaluation of the peso. The move was welcomed by the IMF as an effort to improve public finances and reduce foreign exchange volatility, and largely viewed as a step in the right direction.
However, we believe Milei’s larger structural proposals are unlikely to get much traction within Argentina’s congress. With Milei’s La Libertad Avanza party holding a critically low number of seats in both the lower house and senate, we believe a coalition with Mauricio Macri’s Juntos por el Cambio party will be a determining factor in the success of new legislation. In our view, a coalition would likely moderate some of Milei’s more radical ideas like full dollarization of the economy. Milei has so far shown himself to be a pragmatist willing to negotiate, yet we lack clarity on how he will react against a more persistently obstinate legislature.
Overall, we see the proposed policies as a step in the right direction. The immediate devaluation is already yielding FX reserve accumulation and supporting the goal of a fiscal adjustment reaching as much as 5% of GDP in 2024. Uncertainty surrounding execution remains high, but so far the market appears to be gradually buying into Milei’s agenda with the Bloomberg consensus real GDP contraction for 2024 revised from -1.9% YoY (as of the November survey) to -1.7% YoY as of end-December. We think Argentina is quickly becoming an attractive market, not dissimilar from the early days of the Mauricio Macri administration in 2016 and 2017.
3. 2023 was a challenging year for initial public offering (IPO) activity overall, with reductions in global deal flow and new listings. Do you see any interesting trends driving this shift in activity?
Yes, particularly in the Middle East. Similar to the decline in global IPO activity, listing value in the Middle East North Africa (MENA) region also dropped, from $20.9B in 2022 to just $10.2B in 2023 across 39 transactions (transactions were roughly flat versus 2022 levels).1
IPO Activity MENA Region
Source: Bloomberg, as of 15 January 2024. RHS: Right-Hand Scale. LHS: Left-Hand Scale.
We believe this trend reflects a fundamental shift in the Middle East away from public floatation of large state-owned enterprises and toward smaller-scale IPOs of private, entrepreneur-led entities. It is a transition we believe is necessary for regional exchanges like Saudi Arabia’s Tadawul2 to develop into a vibrant, globally competitive capital market. Here, the pipeline of new opportunities has been robust, with 29 listings in 2023, a slight increase compared to 2022. A number of these companies came from the Nomu Market—Tadawul’s parallel equity market for earlier-stage companies. Based on our existing interactions with private companies across the region, we see an attractive pool of potential opportunities likely to emerge in 2024. The risk to IPO activity in the region is a potential spread of the Israel-Hamas war to other parts of MENA. In 2023, the conflict did not have a material impact on IPO activity.
2 Source: The Saudi Arabian Stock Exchange
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