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George Mallis, chief investment officer and global head of equities at Principal Asset Management, attended the 2024 Milken Global Conference and spoke on a panel about the big changes happening in capital markets as liquidity declines. Demand is weakening, capital costs are rising, and new technologies are adding complexity. George joined a distinguished panel to discuss his views on Artificial Intelligence (AI), where the opportunities lie, and his investment outlook for China.
With many investors entering the private market, what is your view on the public markets, especially the equity markets?
Even after a decade of bull markets, the asset class still doesn’t get the respect that Rodney Dangerfield deserves. There is incredible innovation happening in the secular world, which is reflected in the stock market as a whole, making it an exciting space to be in. Investors should consider capital allocation, especially from a global perspective. The trend of private equity firms buying public companies only expands public equity opportunities.
How is Principal Asset Management addressing the AI and technology “revolution” we are currently facing?
The AI opportunity is truly multifaceted, posing both real opportunities and real risks. AI use cases continue to evolve, and it is natural to expect the pace of usage to accelerate as innovation continues to expand. The evolution of AI is likely to further strengthen the advantage of current large players, given the huge upfront investments required. Unlike the days of the dot-com bubble, these large companies are profitable and have cash-rich balance sheets that allow them to significantly outspend their peers. This creates additional scale and monopoly advantage for the already dominant companies.
At the same time, AI creates competitive disintermediation opportunities for non-traditional players. The technology offers a multi-dimensional perspective that further amplifies the largest players while also providing new entrants with an opportunity to disrupt existing practices. This potential for disruption requires traditional players to consider their potential for disintermediation. From an investment perspective, there are opportunities and risks on all sides.
Technological developments in the field of AI raise the issue of protecting national interests, with countries wanting to keep the technology domestic. Does this complicate your investment thesis?
My first observation is that AI requires a transnational perspective because the value chain supporting high-end computing technologies is global. However, security interests surrounding advanced technologies require an additional dimension when evaluating opportunities. Consider the agreement between the United States, Japan, Taiwan, and the Netherlands to restrict the deployment of high-end semiconductor equipment in China. Why the Netherlands, why Taiwan? ASML and Taiwan Semiconductor Manufacturing are key enablers of cutting-edge computing, demonstrating that investors should expect geopolitics to impact the future of the high-end computing and AI sectors.
From an international perspective, what are your thoughts on China?
China is currently an attractive investment opportunity. While negative views of China have reached extreme levels, many of the current concerns, such as geopolitical tensions and regulatory uncertainty, have been impacting investment in China for quite some time.
Even though Chinese stocks remain cheap, there is still tremendous innovation and growth taking place. Additionally, the Chinese economy is buoyed by a more supportive regulatory environment and an increasingly pro-business government. We are also seeing companies take shareholder-friendly actions, such as initiating share buybacks, increasing dividends, and taking other steps to better reward shareholders, in a departure from past efforts.
Outside of AI and technology, are there any overarching or industry-specific themes you’re particularly interested in?
AI is one of the many ways innovation is happening right now. Another area of interest, although an older one, is commodity mining. Until recently, this was an area of opportunity that was overlooked.
Take copper, for example. The global economy needs copper for electrification and industrialization. Over the past decade, a severe and prolonged bear market has significantly reduced capital investment and adversely affected mining development.
The world has been underinvested in commodities for over a decade and now desperately needs an expansion of supply to support the needs of the evolving global economy. Unfortunately, the ability to expand materials supplies is limited. For example, assuming a company were able to obtain a permit for a copper mine (a difficult task in the current global regulatory environment), it could take five years to expand a current mine or more than a decade to start from scratch.
When looking at commodity mining, it is important to note the supply shortage, which is likely to worsen over the next few years. As investors, duration is on our side. With each passing year, the quality of supply decreases. The best quality is usually mined first, and since mines are finite and depleted, there is less supply. So with a global shortage of commodities such as copper, there is an attractive long-term opportunity for investors.
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
