Old Mutual’s JSE picks amidst AI spending

Investments in Naspers, Prosus, and mining companies offer investors significant upside due to the surge in AI-related spending and the corresponding rapid uptick in commodity prices. 

This also bodes well for the JSE as the Naspers-Prosus nexus makes up over 20% of its weighted value and mining companies a further 20%. 

Old Mutual Investment Group (OMIG) head of equities research, Meryl Pick, explained how South African investors can benefit from the current investment megatrends worldwide. 

Megatrends are long-term, large-scale forces that shape the world. The most prominent of these currently impacting global investors include AI, the energy transition, geopolitics, and deglobalisation.

One approach to finding this investment opportunity is through specific stocks that provide exposure to the megatrends and the regions likely to benefit the most. 

AI as an investment theme has driven global tech stocks to unprecedented heights. Pick pointed out that opportunities are not limited to international stock markets but can also be found on the JSE.

“The JSE All Share Index is still heavily skewed towards Naspers/Prosus and diversified resources shares. This offers excellent exposure to Chinese technology and the resources needed to fuel global energy transition and technology trends,” Pick said.

Naspers/Prosus, through its investment in Tencent Holdings, is thought of as a dated ‘play’ in the internet and mobile age. 

However, Pick believes it offers direct and indirect exposure to the current generative AI trend.

“Tencent is already hinting at introducing its version of the popular ChatGPT product, and we believe the Chinese company is capable of replicating the successes of Google, Meta, and Microsoft in areas like cloud computing and natural language programming.”.

Another advantage for Naspers/Prosus could be that Chinese technology shares trade at a deep discount to their US peers.

“On the surface, the valuations of the big US-listed technology shares do look stretched, and the market will judge these companies based on how well they manage to monetise their technology and grow their earnings.” 

In the interim, investors looking for access to the AI and technology megatrend can gain discounted exposure through Tencent or the JSE’s Naspers/Prosus.

Another indirect way South Africans can participate in the AI trend is through the resources sector. 

There is a huge demand shift for copper and other rare metals, which are used to manufacture chips and data storage infrastructure that support AI.

“If you add the electricity requirements associated with these data centres to the already significant push for green energy, the demand for selected resources will remain elevated,” Pick said. 

Copper is the standout metal, and most forecasters predict tight supply and higher prices in that commodity over the short to medium term. 

Supply is set to remain constrained due to increased environmental scrutiny on new mining license applications and the declining quality of unmined ore bodies.

There is further good news for contrarian investors, as gold is making a comeback. 

Global megatrends linked to demographics and geopolitics are quite inflationary, creating bullish sentiment towards the world’s long-term favourite precious metal, gold. 

Analysts expect structurally higher global inflation to underpin the gold price, with the trend increasing over 10, 15, or even 20 years.

“We have a higher weighting in the gold sector compared to most of our competitors because we believe deglobalisation and shifts in population dynamics will be inflationary.”

“Emerging markets are also diversifying their foreign reserves away from US-based assets, and gold has been a beneficiary of that.” 

The bulk of OMIG’s gold sector exposure is through listed gold miners.

There is a close link between the outlook for commodities and the country’s overall economic performance. 

“We are still a resource-dependent economy; a positive view on commodities such as copper is ultimately a positive view on our trade balance—good for overall GDP growth—and good for domestic financial markets,” Pick concludes.

With around a fifth of the JSE exposed to resources, and another fifth exposed to Naspers/Prosus, these joint AI and resource scarcity megatrends are exactly what the doctor ordered.