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I am going to talk briefly about “the dismal science,” or economics, as it has long been called. The famous Scottish historian Thomas Carlyle penned that term some 200 years ago, motivated by English economist Thomas Malthus’ glum prediction that population would grow faster than food supply, resulting in mass starvation. Of course, such alarmism was proven foolhardy. Malthus failed to consider advances in productivity.
Economic growth at its most basic depends on two factors, population growth and improvements in productivity. Population growth supplies physical and human capital, while technological innovation improves productivity, or the amount of goods or services produced per unit of labor. Of course, it requires capital to create and produce the technological tools that increase productivity. And that is where capital markets come in. While population growth alone will increase the size of an existing economy, productivity growth is necessary to raise living standards.
I delved into this subject because of the hype surrounding Artificial Intelligence, or AI. Many expect it will transform the economy in ways comparable to the railroad that revolutionized transportation, farm machinery which vastly increased crop yields, electricity that “lengthened” the workday, computers which expanded the distribution and usability of information, and automation, which greatly increased manufacturing production. The resulting productivity boom of the electric motor and personal computer after their widespread adoption are shown below.
Some readers may recall the “dot com” boom at the turn of the last century, where any stock whose name ended in “.com” soared to stratospheric heights, even of firms with no earnings or even sales. The euphoria rather suddenly transitioned into the “dot com bomb,” as exaggerated expectations of sales and earnings growth did not materialize.
Can this happen again? Nothing is impossible, but unlike a quarter century ago where stocks of companies with no sales or earnings were bought with abandon, some of the major benefactors of today’s AI innovation are established companies with a history of strong corporate performance. Three of these, Nvidia, Microsoft and Alphabet (Google) are shown below, with estimates of their growth rates.
Royal Bank of Canada has their own favorites. In addition to Microsoft and Google, they include CrowdStrike Holdings (CRWD) and Amazon (AMZN). If you are invested in M&R Capital’s Growth Portfolio, you will own all four of these stocks, as well as chip stocks Nvidia and Broadcom. The universe of AI-oriented stocks is huge. As in any portfolio construction, the challenge is to pick the winners and avoid the also-rans. Contact your M&R Capital Management portfolio manager if you would like further information on these and similar companies.
Wishing You a Great week,