Megatrends in 2024

Irene:

Hi, everyone. Thank you for joining WisdomTree's webinar on Megatrends in 2024 where you'll hear from Christopher Gannatti, our Global Head of Research, and Mobeen Tahir, Director of Research. Some housekeeping items. Before we get started, we'd like to make this session interactive, so if you have any questions to submit live, you could type them in the Q&A section of Zoom and we'll address them throughout the discussion, and please keep in mind that this webinar is being recorded. Now, with that, I'll turn it over to Chris to get us started.

Christopher Gannatti:

Thank you everyone for taking some time with Mobeen and I today. I assume there are people who are dialing in from across the United States. I currently find myself at LaGuardia Airport visiting New York this weekend. Mobeen is in London, so we certainly have the global international perspective here. Something I just pulled up onto the screen, but what we're going to try to do today is cover a number of topics, not necessarily spending a huge amount of time on each one because we only have 30 minutes together. We want to respect that. But I wanted to start off with a particular report that WisdomTree puts out on a monthly basis. And what you see on the screen there, you'll see semiconductors, nuclear, any energy transition materials, things of that nature. And what this is meant to represent is there's more than a thousand different ETFs in the thematic space, and that's really our topic today, thematic investing in the United States.

And what we have done is looked at all of those ETFs, broken them into different categories so that we can get to what we see on the screen, which is a depiction of for the first four months of the year. So through the end of April, what topics in thematics were people actually putting the money into? It's nice to get excited about this topic or that topic, but where the rubber meets the road is where are the investors actually placing the money? And if you go to the right-hand side and you see semiconductors 4.5 with the BN, billion right after it, that's telling us people have been really excited, I think, about Nvidia and then, of course, some of the other semiconductor companies and they have placed within just four months, 4.5 billion into ETFs representing that particular topic, and then you see the next topic, artificial intelligence in big data, 1.1 billion.

Again, that's the first four months of 2024. A mixture of different ETFs that that is where the money is being placed. And then similarly, it's also interesting because sometimes you want to be a bit contrary and you want to go against the grain and you can look in the lower section there and you see blockchain and FinTech, digitalization of finance rise in the middle class, cybersecurity, and you see the negative numbers, so that's where people are pulling the money out of. Again, it's not any single ETFs, it's us looking across the entire landscape. There's 45 or 46 distinct topics. You see basically the top five and the bottom five, so there's a bunch of topics that are not necessarily listed, they're in the middle. We find it interesting that cybersecurity, and in light of people's excitement on AI and semiconductors, we find it interesting that they're pulling 1.0 billion out of cybersecurity.

I mean, we need to secure AI. We can't just run it and cross our fingers and hope here, so maybe cybersecurity could represent an interesting more contrarian opportunity as we look at the flow picture. Now, you have to marry the flow picture in our opinion with the performance picture. So for the first four months of the year, if you were to say, "Is it true that semiconductors having taken in the most money performed the best?" The answer to that would be no. You see it on the right-hand side of this page, semiconductors, the average of all the distinct semiconductor focus ETFs, the average performance was about 9.0%. The best topic, so the average performance of the number one topic was actually wellness. So we didn't necessarily see wellness taking in billions of dollars, but it is interesting for the first four months of the year, 23.8% was the average rise of tension.

Some people might say, "What the heck does that mean?" It's defense oriented strategies. I personally traveled to Geneva about two weeks ago and we were talking a lot about AI in those investor meetings, but we were also talking about the upcoming US election and the implications of NATO, the implications of defense. And I can tell you that particularly outside of the US, people are looking at the situation and they're doing some thinking in terms of, for example, if you're in Europe, how is Europe going to pay for the appropriate resources given the geopolitical risks that Russia represents, the geopolitical risk and issues in the Middle East, the potential threat that China represents as we look through. So it's no surprise that defense oriented strategies are finding their way into the top half of this list. Nuclear is another interesting topic. If anyone has followed the price of uranium, that has been a star performer in the commodity area, and so various strategies that focus on the miners, the equities that potentially benefit from an increase in the price of uranium, you see that.

And then similarly you look down the page, I'm always interested to see space as a topic since SpaceX probably one of the most recognizable biggest names, biggest brands is still private, so how do you invest in space without SpaceX is certainly an interesting one. But I wanted to because, essentially we have the benefit of Mobeen joining us today, and thematics and thematic equities are really a global topic. If people in Europe are getting excited about some of these themes, at the end of the day, the underlying stocks, the underlying companies are the same. Obviously people outside of the US have different investment strategies and vehicles they go to, but those vehicles might very well still focus on the big names that we all know. So it's clear that in the US, semiconductors, artificial intelligence, nuclear have been among the most in focus topics. Cybersecurity has been seeing the outflows. Mobeen, I'm curious on the European side, are there any differences or would you say it's same to substantially similar topics when you do your meetings in Copenhagen and London, and Helsinki across the European landscape?

Mobeen Tahir:

So we do something very similar to what you're showing on the screen here in Europe, Chris. And of course, the key takeaways are quite similar in the sense that you showed that even though funds were going into semiconductors, funds were coming out of cybersecurity, we see that similar dynamic playing out even in Europe. And that really tells us that investors are being quite tactical about thematic investing, which is an interesting paradigm that thematic investing is, of course, all about long-term growth investing. So you invest in a megatrend that is going to unfold over decades, and of course, it's not about investing for a few weeks or months, but of course, market movements do matter and investors are being wary of what's doing well and what's not doing well, and maybe that's influencing why there are flows going into semiconductors and, perhaps, this year flows coming out of cybersecurity even though they are very linked in terms of the underlying theme itself.

The other key observation, which was on the screen here as well and we make in Europe, was the bounce back of sustainable or energy transition materials. That's been an interesting one. We've been advocating that story for quite some time, but we've been disappointed to see the flows and also the performance of that space, but it's been a notable theme that has come back into investor focus, and that's because performance has been good. The energy transition team is heating up again, and that's igniting investor interest.

Christopher Gannatti:

So I wanted to go into a few of the points that Mobeen made. So something that people are able to go to at WisdomTree, I just pulled up the header for a particular blog that was actually just published today, so it hit the website today. The reason we publish this, so you might've heard Mobeen and saying people are thinking a bit tactically in cybersecurity. We may be seeing that as well in cloud. The software space right now is going through an interesting period where people have probably forgotten because memories tend to be short in investing, but this is, I just pulled up, again within this blog where all the information is here publicly available, Figure two is showing us the performance of WisdomTree cybersecurity and WisdomTree cloud computing for 2023. Remarkable numbers. You see the S&P 500 lagging, but what people are feeling this year is this page here. Now, it's not quite to, it's basically through last week and we see significantly negative. Why is that?

And obviously negative performance sometimes means people don't necessarily see the opportunity, they see the exit sign and they want to redeploy those assets elsewhere. Interest rates have been probably the biggest story of the year. They continue to be the biggest story of the year in the sense that with each fed announcement, with each fed governor speaking, people are wondering, "Are we going to see any rate cuts in 2024?" I mean no one outside of the FOMC can say for certainty, but that is a big question that the market has been readjusting because at the end of 2023, it was looking like there were going to be, or at least expectations of interest rate cuts in the early part of 2024, that didn't happen. That is a very helpful catalyst to a lot of these software stocks, many of which are new to the public markets, many of which are not necessarily showcasing positive earnings per share and positive profits.

They tend to take the revenues and reinvest in the business and hire more salespeople or do more software development or build further AI capabilities, you name it. But they don't carry those revenues all the way through the income statement to the bottom line, and so that makes them very interest rate sensitive. So that sensitivity was working in our favor as we saw, cybersecurity was up almost 70% last year, but it's down significantly this year. And we go into that whole story within this particular blog. So since Mobeen was mentioning the volatility in the software space, I did want to showcase that blog. It's one of the big topics. Now, Mobeen was also talking a bit about the energy transition. So Mobeen and I collaborated on this piece. And Mobeen, I know with batteries and electric vehicles, there's a lot of ways that you can take it, but how would you summarize the key takeaways that we were writing about in this particular piece?

Mobeen Tahir:

So this was a very interesting story. Solid state batteries, Chris, for anyone who drives electric, I drive electric. Just a couple of weekends ago I took a long distance journey, only had to charge once on the motorway and very easily I was able to do a 5R one way journey and then back. But of course, I know that a lot of people in the US particularly who do those long journeys quite often, I don't do them that often in the UK, often worry about range anxiety, and that's a very understandable concern when it comes to the adoption of electric vehicles, particularly if you're driving long distances. And this solid state development is an exciting new breakthrough. Toyota last year made a lot of headlines, so we wrote this blog on the back of those headlines that Toyota made and the main headline was that Toyota is coming up with an engineering breakthrough to develop solid state batteries at a commercial scale where they can introduce this battery in their EVs in the next maybe couple of years or so.

And this battery can give an EV a range of 750 miles on a charging time of 10 minutes or so, so those were the sorts of things that made headlines. And of course, if that is to materialize, that would be a game changer for the battery industry. It would be a game changer for electric vehicles and potentially other industries as well. I'm thinking aeronautical, I'm thinking naval vessels, boats and planes that are now increasingly running on batteries as well. So a very interesting story to keep an eye on, and as the story evolves, we see that it's not just solid state batteries, there's a lot going on in the battery world. This is one of the many stories, but it could be a game changer if we indeed see Toyota coming to the market with a model of a car that is actually running on a solid state battery because everyone else will want to do the same.

Christopher Gannatti:

Now, Mobeen and I work together on this podcast here. I just went to a different page of the WisdomTree website here. So we see The Next Big Thing podcast. That's something where if you're familiar with Spotify and Apple podcasts, we posted across all the major podcast platforms. The reason I mention this is Mobeen was talking about different things that batteries can be used for, and Mobeen and I have been in contact with some of the people who work at Joby Aviation where if you've seen some of the videos, I know they've had their 60 minutes segment, the Bloomberg TV segment, the CNBC segment, there's a few different companies where if you see the vehicle, you'll remember it because it takes the idea of a helicopter where obviously a helicopter, you have one or two sets of blades and they're meant to pull the vehicle in an upward direction.

These other vehicles have six or eight blades and some of them will rotate, so it'll take off in a vertical manner and then the blades will rotate and then it'll fly horizontally. Again, I said I'm at LaGuardia Airport right now. I mean, the dream that a lot of these companies would have is you go to Southern New York, a particular location and you hop in one of these things and they say on the different segments it could cost somewhere in the region of a premium Uber and it takes seven minutes to get from Southern Manhattan to essentially LaGuardia or JFK roughly speaking. And even if it takes 10 minutes, 15 minutes, I mean it's an amazing difference relative to having to snake through all the different interstate highways of New York for anyone familiar with the area, and so that's an example of the type of guest that we seek to bring on.

The next episode that should be posted soon is a company Excientia, which they focus on AI enabled drug discovery. So within the AI topic, there are some things that in our opinion are interesting and exciting in terms of 2024, say 2025, I'll talk about one in a minute. But then there are other things that you don't know when, you know they're exciting, but you don't know when. An AI enabled drug discovery is such an example because even if you could take one type of cancer and come up with a significant improvement versus what we currently do for people and in some cases people without any other options and who would fortunately pass away if we didn't come up with anything, and these technologies are already being used to improve the treatment menu of different options in those cases. But it's also true that we spend hundreds of billions on different pharmaceuticals that in most cases don't even get approved.

So you're in a position where the pharmaceutical industry is ripe for potential improvement. AI could be a tool used in that direction, but if you were to say, "Chris, when does that come through to the bottom line of actual companies?" That is a much tougher discussion in the sense that we hear and some people even prior to call were talking about, were asking questions about the GLP-1 drugs, which that's the dream case for any maker of pharmaceuticals. The drug becomes as much of a hit as the GLP-1s. And it's really incredible marketing in the sense that everybody or most people want to live a healthier lifestyle and not necessarily weigh as much and have an easier time losing weight, and these drugs seem to open a new door and a new option in that regard. But that's one example of one drug aimed to treat one specific thing.

There are many other things that we need to work on and to work towards, and unfortunately most drugs, at least in the current methodologies, do not end up as blockbusters like what we see with the GLP-1s. But something that we did recently is we have an AI strategy. Some of the questions were aimed at, does WisdomTree have different strategies? We have six megatrend strategies available for US investors. They cover artificial intelligence, which we'll talk about now, cybersecurity we mentioned, cloud computing we mentioned, battery technology, Mobeen was hitting on that. We have a technology oriented real estate, which includes data centers and cell phone towers, which is an interesting space to be, and then we have biotechnology. So we basically have those six overall topics. If you were to say what is the topic that has the most momentum and excitement and things going for it this year, touching on such companies as Nvidia, it would be this one.

The main thing here, if you were to say when you rebalance the strategy within the last couple of weeks, the two big ideas that we focused on were the largest companies. And when we say the largest companies, we mean companies like Alphabet and Microsoft, and Apple. If people want something to watch for in the news next week, Apple is going to be doing its WWDC Worldwide Developers Conference, and it is widely expected that they will be announcing a variety of different AI oriented capabilities. All the other companies, and when I say all the other companies, Dell has already had such an event. Microsoft had Microsoft Build 2024, they announced the Copilot+ PC. Google had the IO Conference, they announced a bunch of things. They've even had to roll back some of those things since they announced them a few weeks ago. Nvidia has had multiple different conferences where they rolled out the Blackwell chip in March, they rolled out the next iteration, the next chip in Taiwan earlier this week.

So these companies are running these development conferences as they always have, but people are so excited about AI that they are basically seeing international global news coverage. And so the big platform companies have a certain advantage. They have a lot of data, they have a lot of users. And if they deploy, for instance, if Apple deploys a better version of Siri within the next iOS update, I don't know if they will do that, but if they did do that, there's more than a billion people running iPhones that could ultimately benefit. There are not many companies where one software update leads to a billion people doing something a bit differently. The Facebook has more than 3 billion monthly average active users at the end of the day. Now, the other thing that we focused on within this rebalance, which leads to a lot of companies, I looked up and you can look up on the internet, how many semiconductors are in an iPhone 15?

The iPhone 15 is the most current iPhone that's been released this year. Later in the year, we expect to see the iPhone 16, but currently we're on the 15, and I found a resource which basically detailed all the different chips. There were 27 underlying semiconductors. Now, we know Apple designs their own chips. People following Apple, I saw a lot of news on that in recent years, but that does not mean all 27 of the chips are Apple chips. The logic board and the real brain of the Apple device is designed by Apple. That is absolutely the case, absolutely true. But Qualcomm is an example of a very important semiconductor company which is still largely featured in Apple devices. And Qualcomm is an interesting one because it was also featured a lot at Microsoft Build when they were talking about the new surface tablets that can run the Copilot software directly on device.

The key thing here is formally these big models, GPT-4 with the little zero, Google, Gemini, Claude, you name it, all of these models would have to be run in the cloud. And the thinking now is this year is a year where we're going to have the option we being consumers and companies to buy, whether it's a new Samsung phone, a new Apple phone, a new surface tablet, a new laptop, all these different devices essentially have the capability and we'll have the capability to run AI directly in the device, which is very interesting. So this is something where you could see actual revenues and earnings hitting companies later on this year based on whether or not people decide. You see Microsoft prognosticating here in a quote in this blog publicly available for all to see that 50 million AI PCs could be purchased over the next year.

That of course, is not a guarantee. You don't know that, that might be too low of a number, I don't know. But at the end of the day, something we tend to think a lot about is how people got new laptops, at least many of them, back in 2020 when they realized, "There's a pandemic and I have to be ready to work from anywhere." That's now four years ago, and it is within the realm of average in terms of a given laptop lasts between say three and five years, so it is natural to think of that next update cycle and it is natural to also recognize, for instance, with Apple and the iPhone, the general iPhone user has not been too excited recently with the iPhone 14 and the iPhone 15, and the company is certainly hoping for a big boost in iPhone sales, maybe AI running directly in the phone represents that possible catalyst. So that is something to look at, something to think about as we go into the next week.

Now, a key question that we wanted to address and that we did see from the audience, and I wanted to put it to Mobeen because if you're sitting in the US, the China versus US situation and scenario looms large, that affects certain areas like for instance, energy storage. Mobeen was talking about the energy transition and battery technology. A lot of that technology originates in China. We used to have a very globally oriented trade posture, and that seems to be changing and shifting and you see it in semiconductors. Maybe we'll see it in batteries at some point soon. But I was curious, Mobeen, if you can give us a perspective on when you're traveling around Europe, is there that same antipathy between Europe and China that you clearly see within the political stages in the US?

Mobeen Tahir:

Probably not to the same extent, Chris. I think there is certainly no tangible aversion when it comes to investing in Chinese companies among European investors. There are certainly no regulatory hurdles keeping them from doing so, but there is a recognition that of course, if there are sanctions put in place by the US on Chinese technologies and companies, then that impacts their investments. So there is definitely a recognition that sanctions impact tangibly what they hold, but other than that, directly, I think there is not the same level of aversion in my view, I think, over here.

Christopher Gannatti:

It's a strong move when you see essentially a hundred percent tariff thrown down. Admittedly, that might be partly a political move in the sense that if Biden and his administration throw that in there, it's harder for the Trump side of the ledger to use that as a similar type of issue. If it's already covered, it is China versus US is somewhat of a unifying issue within the US government that we see and a hundred percent tariffs, well, they're sending a clear message. Now the final point, because I am keeping an eye on our clock here, again, we committed to 30 minutes with everyone. Mobeen and I together wrote this piece again, publicly available. I leave with this topic because if AI and software is getting all the headlines, and if anyone reads Barron's or Wall Street Journal, I mean you don't have to search too hard to see articles on software companies to see articles on AI, to see articles on Nvidia hitting essentially 3 trillion in market cap in recent days.

So all of that stuff gets covered more than well enough. But if there's one potential nugget to go with that Mobeen and I look at very hard is biotechnology. It's a space that has largely underperformed for the better part of the last three years. Maybe there are some fits and starts where there were some bright spots. And of course, people have mentioned even on this call, GLP-1s, and that has been a bright spot, but more generally in the biotech space, partly due to the rise in interest rates, and then just partly due to the fact that innovation in biotech is very different than innovation in software, you don't see anywhere near the same recent excitement, the same recent momentum, the same recent performance. And so at the beginning of this year, Jeremy Schwartz, our chief investment officer, and I did put out that it's our contrarian play for 2024.

We did put that out. You see it in writing. It has not been accurate or correct yet, but please hold our feet to the fire and we'll be continuing to do webinars like this. And it's the kind of thing where there's a lot of volatility in that space, and maybe it's an area where you see the convergence between AI and biotechnology, and this is the area. Using Microsoft programs a bit more efficiently is nice, but the things that can happen within healthcare and medicine, and helping people who really have the need with a variety of diseases, that's really how lives can ultimately change. So I see that it is essentially 12:30, the time with you has flown by. I say thank you again for taking the time with us. And on behalf of Mobeen and myself and our Events team, we look forward to getting together again soon. And don't forget, if you're interested in these topics, we're publishing stuff on the website and that podcast comes out roughly every two weeks. We would love to have you subscribe and become listeners, but other than that, take care.