Daily Comment (April 21, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s Comment begins with a discussion about the growing popularity of generative artificial intelligence. Next, we give our thoughts on crypto’s sudden resurgence this year. Lastly, we review the latest developments in the race for clean technology and how they may impact the rivalry between the U.S. and China.

Artificial Intelligence: Five months after the launch of ChatGPT, generative AI has sparked both concerns from lawmakers and the imagination of Big Tech firms.

  • That said, the largest tech companies are clamoring to join the generative AI market. The innovation is expected to revolutionize the way businesses generate content. Google (GOOGL, $105.91) is using the technology to create sophisticated ad campaigns. Meanwhile, Amazon (AMZN, $103.81) intends to utilize AI in its web services cloud business. After investing $10 billion into parent company Open AI, Microsoft (MSFT, $286.11) plans to integrate artificial intelligence into its employee platform Viva. We suspect more companies will follow this trend. The year-to-date performance of Microsoft’s stock has outpaced the NASDAQ, 20.58% to 16.10%, in a possible sign that investors are confident in AI’s earning potential.
  • AI will likely be a boon to tech companies as long as governments do not stand in the way. These machine learning apps will be able to provide major tech firms with an alternative source of revenue and could improve company efficiency. However, if the technology leads workers to being displaced, lawmakers may implement regulations to limit the use of these algorithms. The biggest winners of the growing popularity of AI may be the semiconductor industry, as special chips will be needed to handle the large amounts of data required for training and interfacing with AI applications.

Is Crypto Cool Again? Investors have flocked to digital currencies despite fears of a regulatory crackdown as some traders view crypto as an alternative safe-haven asset.

  • Governments are studying ways to prevent speculation within the crypto market from spreading into the economy. Lawmakers in the European Union just approved a comprehensive regulatory framework for the crypto industry. Meanwhile, the United Kingdom is set to roll out its own set of rules over the next few months. The push to regulate digital currencies is due to concerns that the multi-trillion-dollar industry is rife with scams. During his testimony before Congress, U.S. Security and Exchange Commission Chair Gary Gensler testified that he has never seen an industry so non-compliant with laws.
  • Crypto has come back into focus with investors as they look to hedge against exposure to the U.S. dollar. Bitcoin has gotten off to a strong start in 2023. The most actively traded cryptocurrency is up 69.72% since January, significantly outpacing the U.S. dollar index, which is down 1.56% in the same period. The rush into digital currencies is largely related to the speculation that the Fed will end its hiking cycle before it has successfully tamed inflation. Additionally, the strong returns of crypto may be a reflection of investor wariness of U.S. dollar dominance.
  • The surge into digital currencies will likely be bumpy but may be suitable for an investor with a substantially high risk tolerance. The strong performance of crypto is likely being driven by a relatively small group of traders. For example, cryptocurrency exchange volume, by month, peaked at over $2 trillion in May 2021, less than a third of the $6.6 trillion in volume during a typical forex trading day in 2019. As a result, the crypto market has a lot of liquidity concerns for those traders looking to invest in digital assets. That said, as the world moves toward deglobalization, we suspect that crypto may benefit as countries look to diversify away from the greenback.

Climate Change Competition: Competition for market share in the renewable tech industry is heating up.

  • The Chilean government has announced its plan to nationalize the country’s lithium industry. As the world’s second-largest producer of the metal, Chile has decided to seize control of this key mineral resource to prevent the country’s resources from falling into foreign hands. Chile is the latest country to seek greater control over lithium. Last year, Mexico nationalized its lithium sector, while Zimbabwe banned unprocessed lithium exports. Meanwhile, Indonesia is expected to restrict the export of battery-related commodities. The move to protect key renewable commodities is a reflection of the growing importance that green technology will play over the next few years.
  • Additionally, there is a growing turf war among EV automakers as new firms begin looking to expand into foreign markets. On Thursday, Tesla (TSLA, $162.99) announced another round of sweeping price cuts for some of its vehicles as it looks to compete with rivals entering the space. The move was shunned by investors, which led the automaker to adjust the prices of its higher-end vehicles but appears to be a part of the company’s long-run strategy to remain competitive. Meanwhile, motor shows in Shanghai have allowed Chinese automakers to display advancements in vehicle and battery technology. The country is already the world’s biggest market for electric vehicles but there are expectations that Chinese firms may look to sell to other countries. After overtaking Germany in 2022, China is now set to dethrone Japan as the top exporter of cars in terms of volume later this year.
  • The fight over clean energy supremacy will play a major role in the rivalry between the U.S. and China. Renewable technology is one area where China performs better than anyone else. Despite being the world’s top carbon emissions emitter, China has been at the forefront of green technology development. The government has invested significantly in its clean technology and is currently better positioned to capitalize on the global pivot toward sustainable energy. Many U.S. renewable companies use Chinese technology in their products, which explains why the Biden administration has been so adamant in its quest for automakers to source materials from firms operating in North America. Although U.S.-China cooperation is ideal for these countries to meet their climate goals, it doesn’t seem likely at this juncture.
    • If we are correct, governments will be reluctant to completely move away from fossil fuels as the green energy transition is going to take longer than lawmakers realize.

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