Jensen Huang, the rockstar CEO of NVIDIA, recently described Artificial Intelligence (AI) as ‘the most transformative technology of the 21st Century’ which ‘will affect every industry and aspect of our lives’. The CEO of Alphabet, Sundar Pichai, went further, saying AI is ‘probably the most important thing humanity has ever worked on’. Amid all this hyperbole, it can be daunting to know where to start as an investor looking to get exposure to AI. We offer one framework for thinking about this in the Month Ahead for November. We recommend investors start making sense of AI by considering stock opportunities in these three distinct areas:

Artificial Intelligence Providers

It is no coincidence that the world’s leading Cloud Service Providers (Microsoft, Amazon, and Google) are leading the race to commercialise Artificial Intelligence and Large Language Models (LLMs), alongside that technological shapeshifter Meta Platforms. These companies are also known as ‘Hyperscalers’ due to their technical expertise in operating computing infrastructure at levels of complexity that would make your head spin.

The Hyperscalers are typically well funded and cash generative. Their ‘ownership’ of business and personal data puts them at the forefront of building, training, and ultimately monetising LLMs. Collectively, these companies are expected to spend a staggering US$700bn in capex over the next three years, the bulk of which relates to AI.

In many ways, Microsoft (NASDAQ: MSFT) is the most uniquely positioned. As the key supplier of business productivity tools in the world, it has the vast technical expertise, data and customer base best suited to benefit from the rise of AI. As more and more businesses embrace AI we expect they will embrace Microsoft’s AI offering and both parties should benefit. Microsoft reported its September quarterly result on Wednesday and indicated Microsoft AI is on track to be its fastest ever product to reach $10bn in annual recurring revenue (less than three years).

Digital Infrastructure

Digital infrastructure companies power the data centres, cloud computing and research activities that are integral to the digital ecosystem and the rise of AI. Internationally the best-known name in the space is AI chip supplier NVIDIA, which is widely held to be best in class and a unique value proposition.

Enjoying all the benefits of the AI growth opportunity with less volatility are the operators of data centres. Data centres are facilities that store, process, and manage the vast amounts of data foundational to AI, ensuring secure and efficient data flow, backup, and recovery. The largest operators in the world are Digital Realty and Equinix. Digital Realty recently reported a record sales quarter during which it sold double the data centre capacity of its previous high and about four times more capacity than it usually sells in a quarter. This reinforces our view that the significant demand for cloud computing and AI-related digital infrastructure is going to unpin attractive returns and long-term growth.

Here in Australia, the data centre space gathered recent attention following the recent $23bn purchase of private data centre operator AirTrunk. In the listed arena, NEXTDC and Goodman Group are the largest data centre operators on the ASX. Our preferred exposure is NEXTDC (ASX: NXT). It has 17 operational data centres in Australia and nearly a dozen under construction or about to be built across Australasia and Asia.

Data Networks

AI needs a combination of technical expertise, computing power, data centre space and data. An extremely large amount of data is needed to train an AI agent or LLM. Once the training is complete the AI agent also needs to be given regular up-to-date data in order to remain relevant and useful. This is where traditional data networks (such as telcos like Telstra, TPG Telecom, Superloop and Megaport) come into play.

Traditional telecommunications companies will benefit from the astronomical growth of data around AI. Telstra for instance is building a specialist inter-capital network with a A$1.5bn capital budget to fund this project. However, our preferred exposure is through the more specialised and capital-light Megaport (ASX: MP1). Megaport is a global cloud connection network and the leading Network as a Service provider. It operates the largest data centre connection business in the world, connecting to 850 data centres through a fully automated, on-demand telco network. We think it is uniquely placed to help business move data globally and benefit from the growth of data related to both cloud computing and AI.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

There's been much discussion regarding Donald J. Trump's intention to increase tariffs on imports into the United States. Many economists have commented on how this would raise prices in the US and drive up inflation. However, few have examined the strategy behind Trump's comments, which can be found in a book by his trade adviser, Dr Peter Navarro, titled *The New Mega Deal*. Released a few months ago in conjunction with the Republican Convention, it's surprising that so few economists discussing Trump's tariffs seem to have read it.

Navarro, who taught at Harvard before joining Trump’s first administration, previously ran the White House Office of Trade and Manufacturing Policy. His recent book lays out Trump's trade policy in detail, particularly between pages 26 to 29. Navarro highlights how countries trading with the US operate under the World Trade Organization's most favoured nation rule. He starts with the example of automobiles imported into the US, where the tariff is just 2.5%. In stark contrast, when US cars are imported into the European Union, they incur a 10% tariff—four times higher—and a 15% tariff in China. In Brazil, the tariff reaches 35%, despite all these countries facing a mere 2.5% tariff when exporting cars to the US.

Navarro then examines the case of rice. When rice from Malaysia is imported into the US, it pays a 6.2% tariff, whereas US rice entering Malaysia faces a hefty 40% tariff. He also notes that European milk imported into the US incurs a 15% tariff, while US milk going to the EU faces a staggering 67% tariff. From a strategic game theory perspective, Navarro argues that the WTO's most favoured nation rule provides little to no incentive for high-tariff countries to lower their tariffs, allowing them to maintain their tariffs while benefitting from lower US tariffs.

According to Navarro's analysis during his time in the Trump White House, there are 132 countries whose tariffs on products imported from the US are higher than the tariffs imposed by the US. He suggests that if these countries reduced their tariffs to match those of the US, it could lower the US trade deficit by nearly 10%. This insight is crucial for understanding Trump's negotiation strategy. Should these countries refuse to reciprocate, the US could increase its tariffs to match theirs, resulting in a similar reduction of the trade deficit.

This approach could potentially create hundreds of thousands of new manufacturing jobs in the US, thereby strengthening its industrial and defence sectors. Trump aims to pursue this strategy through the proposed US Reciprocal Trade Act, which was initially introduced in the House of Representatives on 24 June 2019 but was blocked by Democrats. If Trump is re-elected, his administration will likely attempt to pass this bill again. Interestingly, Trump has claimed that he does not actually need this legislation, which might be his way of setting the stage for negotiations, suggesting he could use the threat of higher tariffs to encourage other countries to lower their tariffs on American goods.

In recent weeks, we've been discussing growth in the Indo-Pacific, specifically Southeast Asia and India. We believe that growth in this area will replace the growth in demand that has traditionally been provided by China, particularly for the kinds of products that Australia exports.

In this issue I will examine some recent slides from the International Energy Agency's, World Energy Outlook report. The first slide outlines projections for world oil demand between now and 2030. Demand which is expected to reach just under 104 million barrels per day by 2030. Recently, oil demand has been growing by around a million barrels a day, but that growth has recently slowed to about 0.8 million barrels per day. Even with this slower growth, our projections suggest oil demand could reach 105 million barrels a day by 2030, indicating that the IEA estimates might be slightly conservative. Still, they still show a steady increase in demand for oil.

From 2015 to 2023, the biggest single increase in oil demand came from China, with an increase of 5 million barrels per day, followed by India, which saw growth of over 1 million barrels per day. Southeast Asia and Africa also contributed, each with increases of about 0.3 million barrels per day. Conversely, demand in Europe has decreased by about 0.9 million barrels per day, while North America has seen steady demand and Japan and Korea have experienced declines.

Looking ahead, the landscape of oil demand is changing significantly. The International Energy Agency notes that the rapid growth in oil demand in China has come to an end, largely due to the electrification of vehicles powered by a dramatic expansion of nuclear power and renewables. While oil demand in China may stabilise, there is a rapidly increasing demand in India, projected to grow by 2 million barrels a day. Southeast Asia and Africa will also experience growth, each by about 1.3 million barrels per day.

Between 2015 and 2023 the demand for liquefied natural gas (LNG) also rose. Between 2015 and 2023, the European Union saw a demand increase of over 100 billion cubic meters, followed by China with a growth of 74 billion cubic meters. India had smaller growth, while Southeast Asia's demand was flat. Japan’s demand fell.

The future looks different, with significant demand growth expected in the Indo-Pacific. From 2023 to 2025, China will still see a rise in demand of just under 50 billion cubic meters.

Indian LNG demand is projected to grow by about 54 billion cubic meters by 2035, and Southeast Asia, driven by increased manufacturing, is expected to see a rise of 104 billion cubic meters in demand by 2035. Japan is anticipated to see a decline in the demand for natural gas.

Overall, global LNG production is set to increase dramatically, from 600 billion cubic meters in 2024 to about 840 billion cubic meters by 2035. Australia, as a major LNG exporter, will play a crucial role in meeting rising demand, particularly driven by manufacturing growth in the Indo-Pacific, including in countries like Vietnam, the Philippines, and Indonesia.