AI. Copper. Data Centers. Uranium.

[views expressed are personal opinions, and does not constitute investment advice]

Artificial Intelligence

ARK Investment Management estimates that by 2030, ?Artificial Intelligence (“AI”) may have the following possible impact on the global economy;

a)?????? AI hardware spend of $1.3 trillion, to support $13 trillion in AI software sales with expected traditional software margins of 25%.? The digital “I-a-a-S” economy seems to be at our doorsteps, Infrastructure-As-A-Service.

b)????? Recurring consumer spend on AI powered intelligent devices estimates of $60/internet user per year, a potential $5.4 trillion economy.? Approximately 80% of this growth will accrue to advertising and commerce, balance between hardware and entertainment.

?

Nominal global GDP at the end of 2023 was estimated at US$105 trillion.? Even if one discounts ARK research findings, by say 50%, or more if you will - the tailwind to the global economy by adoption of this generational technology is a staggering net addition of 11% over 7 years, or 1.6% per annum.? ARK research, taken at face value, would translate to 3% net addition to world GDP per year for the next 7 years.

The IMF/World Bank are possibly underestimating the impact of AI in future forecasts.? Is it a coincidence that that the bulk of the decade in the 1990s witnessed strong global growth? Back then, the rapid adoption of technology from the internet champions (Microsoft, Cisco, IBM, Dell, HP, Compaq amongst others) boosted productivity and accelerated the spread of global economic gains.

The future looks bright. For centuries, the world has been revolutionized by new platform technologies.? AI is likely to change the way we experience the world.? Productivity will soar, new industries will be created, and the gains will ripple through global economies. Perhaps, initially, these gains maybe be unevenly distributed and tilt the digital bargaining power to those who have a head start.?

For investors, the multi trillion-dollar question is – how to access this growth? Which countries will lead it? Existence of home-grown AI champions, surplus and highly productive economies where protection of intellectual rights and private property is unquestionably beyond doubt are perhaps filters to apply.? Availability and scale of a skilled workforce to harness, innovate, and deploy AI solutions is perhaps another important factor.

For real estate investors, these choices present massively skewed risk-reward outcomes. ?It is perhaps prudent to concentrate investments in high conviction bets around digital infrastructure, talent gateways and provision of affordable, experiential accommodation for a generation with different values/priorities.

?

?Copper

One of the biggest beneficiaries of the re-electrification of the global economy in the commodity world is Copper.? The most efficiently known conductor of electricity is expected to be more intensively used in all new sustainable economies; Electric Vehicles (EV), Renewable Energy (ReNew) batteries, cabling, and wiring for dense AI ready Data Centres (DC) and so on.

Copper prices tell another story in the post- Covid world. ?Notice the sharp divergence in the relative performance of Copper futures prices as a telling commentary on health of the two largest global economies: USA and China.?

An open, rapidly innovating economy, particularly the US, has leapfrogged relative growth with China given China’s self-imposed post Covid economic isolation. The latter’s problems, for the moment, compounded by an aggressive recalibration of the relationship between the state and the private economy stakeholders. ?When was the last headline on “China is expected to overtake USA’s GDP by 2030” ?? The implied slowdown in China is concerning for global prosperity.? On the flip side, the deflationary bust in the property sector is the best news that the US Fed and the ECB could hope for as an ally in the fight against inflation.

Cheaper copper, temporarily, is a tailwind for the rapid build out of the sustainability linked verticals globally.? BloombergNEF[1] estimates, in 2023 the world committed $1.8 trillion to sustainability related investments, a figure expected to balloon to $2.8 trillion by end of 2024. ?Despite the doom and gloom of seemingly unprofitable green investments and the rising pile of financial troubles in the sector, the future direction is unmistakably towards a better, greener future.

As environmental approvals for “dirty” industries such as mining and processing becomes tougher, the pricing of copper may overshoot demand. For a global economy buffeted by geopolitical and trade war frictions, copper dynamics may hide subtle fractures.

Data Centers

Over the last decade, the retail store front evolved to be one’s favorite e-commerce portal. Similarly, the next generation of workplaces is about to be upended.? As AI adoption takes hold and data powered applications more actionable, across many industries your most valuable colleague is going to be the AI powered machine.

The next economic war, between companies and sovereign actors, will be fought in very capital intensive, spartan, energy quelching buildings.? Welcome to the era of Data Centers as the pointy edge of business dominance.? The next few generations of powerful platform technologies, such as AI, will be housed, distributed and strengthen the hinterlands that they serve.? Countries that fall behind will become renters in the digital age and be forced to pay up to those controlling these dour keepers of national security, economic productivity, and comparative advantage.

Some important questions arise:

-????????? What will this mean for exit values of legacy Data Centers that can’t be repurposed to the demands of the new machines?

-????????? How will ecosystems that can’t procure the powerfully designed chips compete with those who can influence who gets access to it?

-????????? What will Data Centers evolve into in the not-so-distant future with the advent of commercial deployed Quantum computing at scale?

-????????? What if an organization or country falls out of favor and someone decides to violate their data privacy?

To imagine more lucrative avenues to deploy capital and operate assets other than Data Centers is currently hard. Affordable housing is perhaps another, that’s a discussion for another day.

For investors and asset managers who are attracted to Data Center opportunity, some factors to consider include: ability to build from scratch to the specifications of new technological innovations, constant reinvestment for upgrades, operating and managing to 99.99% uptime. Building capability and raising sufficient capital takes years of pursuit of perfection.?

Estimated investment in Data Center infrastructure[2] was $120 BN in 2023 and expect to compound at 15% per year until 2028. What is your digital infrastructure strategy and future?

?

Yellow Cake

COP28[3] marks an inflection point for Uranium.? Characteristics include; A fuel that can power reliably for upwards of 40 years, requires little incremental energy feeds, proven low emitter of carbon and safe to handle under appropriate safeguards.

Every 10-15 years as enthusiasm for Uranium grows, an unforeseen disaster happens that sets the adoption clock back.? Chernobyl, Fukushima are some recent outrages that provoked outsize hostile responses.

However, the climate clock is apparently ticking towards apparent doom a tad faster[4] than anticipated. Expected coordinated global effort and investments predictably is slack and rising incomes around the world fuel the desire for lifestyles that climate scientists predict is unsustainable[5].

Barring an energy technological breakthrough of 3σ dimensions in the next decade that fulfils the promise of cheap, reliable, carbon neutral supply, there is no turning back. It is another small matter that such breakthrough needs to be compatible with current grid infrastructure and deployable at scale globally in an easily executable, modular fashion. Uranium powered reactors are a vital bridge to the climate sustenance challenge.

[Hydrogen solutions are another breakthrough for climate neutral energy production as the base green hydrogen infrastructure gets built. Hydrogen is more politically palatable and currently perceived “safer” for deployment in proximity to urban areas]

The trifecta of a highly empowered global village is seemingly within reach. Freedom from mundane, repetitive tasks delivered by AI driven machines, exchange of trusted value secured by CBDCs[6], and a resilient future predicted accurately by Quantum processors, most of it and powered by ubiquitous ultra safe Uranium reactors at the microgrid level.

The super real assets manager over the next decade will be an investment firm that builds world leading expertise in digital assets housing the latest computing technology, which is powered by carbon neutral, sustainable energy.? The niche, independent real estate specialist and legacy manager/operator may become a limited impact player focused on renting expertise to large multiskilled capital allocators who are building for the future.

?

Duration Risk

Lastly, this is a verbatim quote from a recent investor report from a European real estate manager. ?

“Due to the significant market declines, the loss in total Gross Floor Area and changes in the usage mix, the Manager’s projected exit value has decreased to XXXX and at this level price and with an extended holding period, the Manager projects an IRR of -15% and equity multiple of 0.30x on a mark-to-market basis. The Manager’s sensitivity analysis shows that should Euribor decline by 100 bps from the 300bps used in the current analysis, the equity multiple may improve to 0.66x “

?

Higher for longer interest rates are nibbling away at, if not quickly destroying collateral value. When will this end, and how will this transition to everything AI powered by sustainable energy play out? What gives? What is your capital raising strategy?

?

?

?

[1] https://www.bloomberg.com/news/articles/2024-01-30/china-leads-global-clean-energy-spending-which-record-1-8-trillion-in-2023

[2] https://www.structureresearch.net/product/2023-global-data-centre-colocation-interconnection-report/#:~:text=Looking%20ahead%20to%202023%2C%20the,to%20come%20in%20at%2013.5%25 .

[3] https://www.energy.gov/articles/cop28-countries-launch-declaration-triple-nuclear-energy-capacity-2050-recognizing-key

[4] https://interactive.carbonbrief.org/one-point-five-pathways/index.html#:~:text=The%20Paris%20Agreement's%20long,reaching%20even%20higher%20warming%20levels .

?[5] https://news.stanford.edu/2023/01/30/ai-predicts-global-warming-will-exceed-1-5-degrees-2030s/

?[6] https://cbdctracker.org/