Oregon prepares for stunning productivity gains from AI

AI is a paradigm shift of great importance, warned one of Oregon Investment Council’s (OIC) most long-standing and trusted advisors. Speaking during the investment division’s December board meeting, Lewis Sanders – CEO and co-CIO of Sanders Capital and ex-chair and CEO of AllianceBernstein whose relationship with OIC extends back three decades – espoused the importance of the investor incorporating AI into all economic models, especially the equity portfolio.

“It’s a really big deal. Take AI seriously,” he said.

The technology is the ultimate democratisation of knowledge and know-how. It will have a huge impact on computer coding, lead to productivity gains and bring software even more into business and our personal lives at speed.

Sanders said major companies are already exploring how to integrate AI and in time, and with additional development, will derive productivity gains derived from AI that bring a “measurable, substantial,” inflection that “will show up in aggregate GDP”.

Sanders also impressed on the investment committee which oversees $140 billion of investments including the $97 billion Oregon Public Employees Retirement Fund (OPERF) the “stunning” and enduring performance of the Magnificent Seven, rebuffing any suggestion that these companies’ stellar performance might be a bubble.

Collectively, the Seven accounts for nearly 50 per cent of the increase of market capitalisation of US equities over the last five years (driven by the increase in earnings) of which Nvidia’s earnings are the most stellar, rising from $3 billion in 2019 to $100 billion this year.

“Nvidia, a single company, added 200 bp to the growth of corporate earnings in the US in the last five years,” Sanders said.

He said that this is not an extreme valuation or a fantasy. “This is real.”

The capitalisation of the Seven is equal to that of all publicly traded equities added together in Japan, Hong Kong, Canada, Germany, China and France and the UK, he continued.

“These companies account for 6 per cent of the expected 10 per cent gain in earnings for the S&P,” he said.

Unique offerings

Sanders also argued that the Seven companies’ success is unique to each one. They don’t share a common factor like companies did during the internet bubble, or the oil bubble of the 1980s, for example. The only link they share is that they all inhabit the entrepreneurial tech landscape in the US that is superior to all other regions in the world.

“China is the only apparent potential challenger.”

Although these companies are subject to global and economic risk; regulation and litigation, their business fundamentals are different to each other.

“Microsoft is different to Amazon; Meta is an advertising company and Nvidia is involved in computer infrastructure. There are no monolithic factors that tie these companies together.”

Sanders said the US economy has proven resilient to monetary tightening. Meanwhile, the then-imminent Trump administration’s promise to reduce taxes and regulatory constraints to business development; stimulate investment in traditional energy and (“if you are an optimist”) use tariffs as a threat to improve the terms of trade, is likely to fan markets and stimulate more onshoring and FDI in the US.

“US equities by almost all measures are over-priced, “he said, explaining that Trump trends, and the magnificent Seven, will drive momentum further.

He explained that investors are willing to accept less extra return to expose themselves to equities. He advised the board to respond to the compression of risk premia by increasing diversity in the portfolio, creating a strategy that neutralises any change in the sovereign curve, commodity prices, or the pace of economic expansion.

He poured cold water on the idea that the US government is labouring under excessive debt.

“The debt load seems high but it’s not actually,” he said, explaining that the economy is continuing to grow and the strength of the dollar is proof that the economy can cope with debt. “I don’t see the systematic threat, no one does, it’s why risk premia is low.”

In contrast, the EU and China are experiencing high-risk premia in equities and currencies.

“The EU is now seen as your proverbial basket case, where growth aspects are impaired,” he said.

Not only is Europe embroiled in a tragic ground war, but economic growth is also impacted by regulation and protection, and innovation is scarce. He told the investment committee that the EU’s green energy imperative has generated high costs with no immediate economic benefits. The region’s leading economy, Germany, has suffered from being overly exposed to China’s local market and manufacturing in mature industries.

“There is a high-risk premia for EU centric businesses. Banks are the poster child for this,” he said.

staying private for longer

Because more companies are staying private, the ability of public market investors to benefit from the trail of innovation that typically starts in private markets has slowed.

“Innovation in private markets used to come to the public markets relatively quickly, but this is no longer true,” he said, explaining that successful companies are staying private because capital is easily available and they are choosing to avoid the significant burdens of going public.

“If you want to be exposed to wealth creation you need to be in this space. Public investors gets access after it’s too late.”

Still, he did flag the negatives for investors in private capital like illiquidity and the cost of leverage compared to the past. The amount of capital chasing private credit is also a source of particular concern.