Buying the S&P 500 is an active bet on AI: BlackRock Investment Institute
The unprecedented artificial intelligence boom is catalysing a mega structural change that impacts investing, it says
[SINGAPORE] Just buying the S&P 500 is no longer a passive bet on US equities, but is an active call on artificial intelligence (AI), given the concentration of the index.
“That’s the reality of the underlying concentration and positioning, so we think it’s important for investors to be real and accept that,” Ben Powell, chief investment strategist, Apac, at BlackRock Investment Institute, told The Business Times.
Diversification has to be sought in a more active way, he added. Apart from US equities, investors will need to look globally and across asset classes for opportunities. They can also look down the supply chain from chipmakers to commodities such as copper, for the copper wiring needed to fuel AI growth.
“We think it is necessary in a world where the traditional 60/40 (ratio of the) equities index to treasuries unfortunately is not going to get the job done in a way it did previously,” said Powell.
The concentration has made a few companies significant to global markets. BlackRock remains overweight on US stocks with the AI theme.
BlackRock says that the unprecedented AI boom is catalysing a mega structural change that impacts investing.
With AI transformation happening at a more rapid pace than previous mega forces like the Internet, BlackRock is forecasting that AI will reach a level close to the largest buildout in half the time.
“This could be a hinge moment where things change, and we don’t go back to before,” noted Powell.
This boom has also pushed the importance of a few corporate giants above monetary policy, making their actions impact global markets and economies.
This is also reflected in the S&P 500, which makes even passive investing an active investment into AI, given how gains from tech giants move the index more than any other sector currently.
“For those investors who are thinking of S&P 500 as a passive investment, if you just do the math, it’s clearly been a very significant active bet on AI,” explained Powell.
The amount of capital these AI companies will need to grow is massive, but the firms are unlikely to need to turn to the credit markets. These companies have strong cash generation and balance sheets, as well as multiple avenues to raise cash, including capital markets.
Credit spreads are tight, and BlackRock Investment Institute thinks that it is not obvious that there is huge value in credit. BlackRock is underweight on longer-term investment grade bonds and treasuries, as the spreads remain tight.
“We’d actually rather take the equity risk on a valuation-adjusted basis we think is kind of the better opportunity from here,” said Powell.
As for concerns around the relationships and potential circular financing between AI companies and their ecosystem, Powell sees it differently as it is quite normal for companies in capital intensive sectors to have relationships with their suppliers, which includes financial relationships.
What is happening with the AI industry is not a massive outlier, as other industries such as energy and automotive have done the same, Powell noted.
The difference is the speed at which AI is moving – the energy industry, for instance, had the big oil players build up these relationships over a long period of time.
The AI ecosystem already existed even before its breakout moment with Chat GPT 3, which was available around five years ago in June 2020. When the world realised the potential for AI, that’s when the demand grew exponentially, Powell pointed out. “That has created the required capex spending, the funding that’s coming through, including some relations between the certain parts of the supply chain.”
It has been the speed that has caused discomfort to many people, with the rapid pace of data centre and energy infrastructure buildouts. BlackRock will continue to watch closely how this plays out, Powell said.
He added: “Be intentional, recognise that this is a time to be active and try to be thoughtful and skilful to have an active, curated and well-diversified portfolio which can be in line with your financial goals.”
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