Two surefire thematics for the next two years (and 3 stocks to play them)

While 2024 has been a very positive year so far, many risks and opportunities are bubbling below the surface while the headlines are dominated by AI and the Magnificent 7.

The AI rally (or bubble, whatever your opinion) has dominated fund flows, and generally given a sense of optimism, despite the rest of the market underperforming. But, as markets involve human beings and their emotional sentiment, the novelty inevitably wears off the initial AI winners and eyes turn to “what's next?”

So what themes will they be looking at? And given the volatility during these transitions, what will be the best way to play them?

The 2 clear themes that stick out to us, are the infrastructure build for AI and the looming fiscal train wreck of the US budget.

AI is, without doubt, the standout thematic opportunity of the next 10 years, but the next two years will not play out in the way we have seen in the first phase over the last 18 months. Phase two of this game-changing technology will be all about AI infrastructure and powering the new hardware.

The other theme? Well, this one has a foot in the risk camp, the store of value trade. While geopolitical uncertainty and a spiralling US debt might seem like a massive flag for investors, we see opportunity in the return to the safety of real assets like gold, silver and commodities. 

Powering AI

The rise of AI in the past 18 months has been incredible. In that time, the US market has conservatively added $3 trillion in market cap due to AI and the likes of Nvidia (NASDAQ: NVDA) are up a whopping 400%. The consequence of this extreme spending on GPUs has led to a similar rise in data centre demand, with Nvidia’s GPU data centre sales up 409% in the last 12 months. There is no doubting the AI phenomenon, but now we have to power it.

Phase two of this game-changing technology will be all about AI infrastructure and powering the new hardware. Data centre infrastructure and centre managers are the obvious winners, but the capacity has to be built, which knocks out the data centre managers with uncertainty around delivery risk on the projects, so we are looking at what they will need to build them.

Wiring and dependable electricity are a must for data centres. For wiring and cabling, they are going to need copper and for dependable and expandable power, nuclear is the smart choice.

 

AI and Nuclear Power: A symbiotic relationship

As AI capabilities expand, stable power sources for data centres become crucial. Nuclear power plants meet this demand, offering sustainable, reliable energy that aligns with global clean energy goals. They also provide ample cooling for servers.

A key example is Amazon Web Services' acquisition of a 960-megawatt nuclear-powered data centre in Pennsylvania from Talen Energy (OTC: TLNE), powered by the adjacent Susquehanna nuclear plant. This facility underscores the reliability of nuclear power, crucial for data centres needing uninterrupted operation. The deal aligns with Amazon's (NASDAQ: AMZN) goal to reach net-zero carbon by 2040 and fully power operations with renewable energy by 2025.

Nuclear power is central to decarbonisation efforts. The U.S. aims to enhance nuclear capacity by 2050 to achieve climate targets, emphasising nuclear as a consistent, carbon-free energy source. Despite challenges like high costs and project delays, new technologies like small modular reactors (SMRs) promise to make nuclear power safer and more economically viable.

As AI evolves, the need for sustainable, reliable energy grows. Nuclear power offers large-scale energy production with minimal carbon emissions, making it an ideal solution for increasing computing capabilities.

Our pick here is the world's second-biggest uranium producer, Cameco (NYSE: CCJ)

Cameco’s stock price is currently being weighed down by past deals where the company committed a large chunk of production to utilities at $55/lb, meaning it's missing out on the extra $30/lb margin it could have been enjoying. However, many of those deals will roll off over the coming 2 years, and if they are smart, they will only fulfil what is contracted and stockpile the rest

Data centres’ expanding copper needs

AI technologies drive demand for copper to construct and operate AI data centres. Copper's superior electrical and thermal conductivity makes it essential for the robust infrastructure needed to handle extensive power and cooling demands.

Projections show that copper demand from data centre growth could reach about 1.1 million metric tons annually by 2030, representing roughly 2.8% of global demand. According to BloombergNEF, copper is already projected to be in deficit by one million tonnes in 2024, not including AI data centre demand. This creates a new demand shock for copper markets already in deficit.

Major AI players like Amazon, Nvidia, Microsoft, Alphabet, Meta, Apple, and Tesla have significant influence and cash reserves, with free cash flow growing to $309 billion as of February 2024. The need for copper to expand AI businesses is recognised by investors like Bill Gates and Jeff Bezos, who back KoBold Metals, a company using AI to find new copper deposits.

The problem is that the AI infrastructure demand has emerged FAST, and we are already facing a supply gap due to the energy transition in copper. Add to this that many of the world's largest copper mines are reaching the end of their deposits and it takes about 12-15 years to open a new copper mine, that supply gap is going to end in one thing, higher copper prices, especially when the most cashed up companies in the world need it!

Return to Real Assets

The fiscal and monetary policies of the past decade have heavily influenced equity markets, characterised by significant money printing activities by central banks, especially noticeable post the Global Financial Crisis (GFC). Commodities have been left behind in terms of inflation-adjusted returns compared to equities and we expect this to readjust back to the historical average as investors come to the realisation that the printing presses can't be left on forever.

Consequences of the spiralling US debt

The US government debt has skyrocketed to a staggering $34 trillion, growing by $1 trillion every 100 days with similar trends observed globally. This unsustainable path has increased reliance on the U.S. dollar, which holds the status of the world's reserve currency. However, as debt levels continue to climb, there is a noticeable shift towards real assets. Investors, wary of currency devaluation, are increasingly turning to traditional stores of value like gold and silver

Here the safest candidate is the yellow metal that has been accepted as a form of money for thousands of years. Gold had a strong rally in the first half of 2024 where it rallied from $2000 to $2400 and then has spent the last few months consolidating that move above $2300.

Despite a stronger US dollar, gold remains solid. Central banks have continued their record appetite for gold and set a new Q1 record for gold purchases. This continues on the back of record buying in 2022 and 2023 where they bought more than 1000 tonnes each year. Having a buyer with such deep pockets behind a thematic means that there is a decent probability that prices should continue to rise.

 

Geopolitical Tensions

With multiple situations bubbling below the surface globally, the attraction of real assets is compelling. Iran/Israel, Iran/US, Russia/Ukraine, China/Taiwan, the potential of cyber attacks, the divide in US politics. Sadly, the list is long in 2024.

While “flare-ups” in tensions are usually short-lived in equity markets, the concerns we have are from a long-term perspective with many countries showing signs of nationalism after they had a taste due to COVID.

This sentiment (or mood) of the populous is clear with the recent swing to the right in global politics, which could lead to a reduction in free trade or trade wars. The EU has already imposed tariffs on Chinese EVs while Presidential hopeful, Donald Trump has threatened 60% import tariffs on the same vehicles.

The divide between the NATO and non-NATO nations is growing and is most prevalent with the formation of BRICS, a coalition of Brazil, Russia, India, China, and South Africa as an alternative to the U.S. Dollar.

While the influence of a BRICS coalition and the establishment of a new reserve currency, backed by gold, could be significant, including leading to a decline in demand for the U.S. Dollar, given the group commands 42% of the world’s population, economically, they are less influential.

Newmont (ASX: NEM) is our pick in the gold space, as given its geographical diversity, a mix of copper production of around 30% to overlap the “powering AI” theme and the fact that it is the only gold stock in the S&P500 which will make it the go-to stock for US investors.

How to play it

The important part is knowing how to play these themes. In my long career in markets, (more than half as a professional trader) picking the theme has never been the issue, however timing the move remains one of the hardest things to do in investing.

So to avoid the frustration and risk involved with playing these themes, for our clients we are investing via a structured product on a 3-year timeframe (s708 only, link below) 

But if you are willing to tolerate a bit of volatility that comes with commodities and energy investing, you can just buy the following stocks - BHP (ASX: BHP), Newmont (ASX: NEM), and Cameco (NYSE: CCJ).

Interested in investing in this thematic or MPC Markets? click here