The Ebb And Flow Of Public Markets

Chief Investment Officer and Global Head of Equities, Principal Asset Management, George Maris attended the 2024 Milken Global Conference, where he spoke on a panel about the significant shifts happening in capital markets as liquidity wanes, capital costs rise, and new technologies add another layer of complexity. Along with a panel of esteemed peers, George discussed his views on artificial intelligence (AI), where he sees opportunity, and his views on the investment prospects in China.

With so many investors moving into the private markets, what are your views on public markets and, more specifically, equities?

Even after ten years of a massive bull market in public equities, like Rodney Dangerfield, the asset class still gets no respect. There is incredible innovation happening secularly which is represented across public markets, making it an exciting area in which investors should consider deploying capital, particularly from a global perspective. The trend of private equity firms acquiring publicly-listed companies only magnifies the opportunities in public equities.

How is Principal Asset Management approaching AI and the tech “revolution” we are currently in?

AI opportunities are indeed multifaceted, presenting both real opportunities and real risks. Use cases for AI continue to evolve, and it’s reasonable to expect a heightened pace of usage as innovation continues to expand. The evolution of AI likely further reinforces the advantages of current large-scale players, given the massive upfront investments required. Unlike during the dot-com bubble, these large-scale firms are highly profitable and possess cash rich balance sheets, allowing them to massively out-invest their peers. This creates further scale and monopolistic advantages to already dominant firms.

Simultaneously, AI presents competitive disintermediation opportunities for non-traditional players. The technology offers a multidimensional perspective of further scaling the largest players while providing opportunities for new entrants to disrupt existing practices. This potential for disruption requires examining the potential for traditional players to be disintermediated. From an investment perspective, there is opportunity and risk across the lateral spectrum.

Technological developments in the AI space raised the issue of national interest protection, with countries wanting to keep their technologies within their borders. Does that complicate your investment thesis?

My initial perspective is that AI will require a cross-border perspective, as the value chain supporting high-end compute technology is global. However, the security interests involved with advanced technology will require an added dimension in assessing opportunities. Consider the agreements of the U.S., Japan, Taiwan and the Netherlands to restrict the deployment of high-end semiconductor capital equipment to China. Why the Netherlands and why Taiwan? ASML and Taiwan Semiconductor Manufacturing Company are critical enablers of the most advanced computing, indicating investors should expect geopolitics to play a part in the future of high-end computing and AI space.

Staying international, what are your views on China?

China is currently a compelling investor opportunity. While negativity toward China reached extreme levels, many current concerns, such as geopolitical tensions and regulatory uncertainty, impacted investments there for quite some time.

Despite China trading as cheaply as ever, there is still an incredible amount of innovation and growth happening. Additionally, the Chinese economy is supported by a more supportive regulatory environment and an increasingly pro-business stance from the government. We are also witnessing companies act more shareholder friendly, including initiating buybacks, increasing dividends and acting with a shareholder return thoughtfulness that marks a turn from prior engagement.

Are there any other overarching or industry-specific themes outside of AI and tech that you’re paying particular attention to?

AI is one of the many ways innovation is currently occurring. Another area of interest, despite being an old school sector, is commodity mining. Until recently, this was an overlooked area of opportunity.

Take copper, for example. The global economy needs copper for electrification and industrialization. During the prior decade, mining development was negatively impacted as capital expenditures were dramatically reduced due to a deep and prolonged bear market.

The world has underinvested in commodities for over a decade, and now desperately needs a growing supply to support the needs of an advancing global economy. Unfortunately, the ability to expand materials supply is constrained. As an example, assuming a company can get permitted for a copper mine – a difficult task in the current global regulatory environment – it may take five years to expand a current mine and upwards of 10 years to start from scratch.

When looking at commodity mining, the key is to note the dearth in supply, which is only likely to worsen over the next few years. As investors, duration is on our side: every year that goes by the quality of supply degrades as the best quality is generally pulled out first and less supply is available as mines are finite and get depleted. So, with the world short on commodities like copper, there are attractive long-term opportunities for investors.

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