Electrification boom and bubbles
By Peter Garnry, Head of Saxo Strats
- Electrification boom: The boom in AI is creating a major shift in demand for electricity and grid infrastructure. We highlight the major US and European companies in grid technology.
- US equities bubble: Last week’s all-time high has pushed US equities back into bubble territory.
Electrification is the next wave
The two big themes this year have big defence and AI. All waves end at some point and a new one will come. We believe that the next wave in investment themes will be electrification due to the massive demand for datacentres filled with GPUs to train AI models and compute inferences from these models. Bloomberg recently did a podcast with Brian Janous, the former Head of Energy at Microsoft, in which he explains that electric utilities have gone in one year from projecting zero growth in electricity demand over the next 10 years to a doubling. The message is that this increase in electricity production will create a big investment boom in new power plants and renewable energy projects, but also buildout of new electricity grid infrastructure. From an investment angle our view is that grid technology is the sweet spot.
The biggest players in the US and European grid technology industry (power lines and transformer stations etc.) are GE Vernova, Siemens Energy, ABB, Schneider Electric, Eaton, Nexans, and Prysmian. As the chart shows below, the total return for these companies has been quite good over the past five years and the AI boom has extended the momentum even more. This year these stocks excluding GE Vernova that was IPO’ed in April are up 31.2% on an equal-weighted basis beating the MSCI World by a big margin. One could argue that the electricity grid theme is already running, but in the minds of investors and in terms of media headlines it has not rose to attention yet. For investors that want to diversify their portfolio’s exposure to AI considering these companies in electricity grid technology might be a good idea.
Has AI created a new bubble?
When we look across last week’s performance we can see that the information technology sector is the only sector that is up while interest rate sensitive sectors such as consumer discretionary, utilities, and real estate have been under pressure. Across regions things have been muted, but as we highlighted in last week’s equity update, US equities are back to all-time highs and it begs the question of whether we have a bubble again.
Looking at our valuation model on US equities there are signs that US equities are getting too expensive again and that investors should consider reducing exposure to US equities. In last week’s update we flagged European equities as the most interesting alternative right now to US equities and that is still the case. Based on our valuation chart we can say that we have had three bubbles in US equities since 1992. The first came during the 2000 dot-com period, the second was the technology bubble during the pandemic reopening in 2021, and now this AI fuelled bubble with Nvidia shares spearheading the move.
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