US companies leveraging innovation as an inflation hedge

US companies are shoring up to be viable investment opportunities for Australians, after proving the positive impact of innovation and investment in technology on their corporate performance.

According to Global X ETFs’s Head of Investment Strategy, Scott Helfstein, innovative companies have continued to perform strongly despite warnings of economic slowdown and sticky inflation, with S&P 500 companies delivering profit margins above 12 per cent for the past 11 consecutive quarters.

Helfstein credited this strong performance to the companies’ focus and ‘re-investment’ in automation, digitalisation and all things artificial intelligence (AI).

“What really matters are the three ‘Ls’ – labour, leverage, and liquidity – all of which are painting a positive picture. Consequently, the Fed is sitting back in comparison to the previous three interest rate cutting cycles where it seemed they couldn’t cut fast enough,” Helfstein said.

“The Fed’s 2% inflation target is becoming less credible the longer they maintain their stance, add in encouraging economic data points, stock market strength, and the US election in November, I do not expect a US rate cute until at least December 2024.

“With the awakening of AI, we are living through the fourth great innovation boom, and it’s being driven by corporate America. Although it may be tempting to compare this market to that of the dotcom era, I’d highlight that the dotcom bubble was exorbitant while the AI rally has been largely rational with lower price-to-forward multiples and performance metrics aligned with quality investing.

“The real place we should be drawing a parallel between the dotcom and AI phenomena is that both technologies have and will fundamentally change the world as we know it. So, when people ask me whether they have missed the AI opportunity, I say, ‘sure you may have missed Nvidia, but the ship has far from sailed’.”

“The internet absolutely revolutionised every facet of life, it just took an additional 15 years than when the dotcom bubble burst because there was more groundwork to be done before it was viable, and I expect the same to be true of AI.”

Helfstein said companies that are concentrated at the centre of AI development and implementation are poised to continue a strong growth trajectory, such as semiconductors and cloud computing. However, investors will also find opportunities in companies involved at the periphery that are set to benefit from AI growth, such as nuclear energy.

“More AI, equals more computing power, equals more energy – it’s a simple equation really. Nuclear energy is coming online in the US while Japan is turning their reactors back on and major European economies are back under pressure to use nuclear as sanctions on Russian commodities squeeze supply. All things indeed being equal, demand for uranium and nuclear energy will rise alongside AI,” he said.

“Ultimately, these thematics can be difficult to access for Australian investors because they are UScentric. Thematic ETFs provide local investors an accessible route to a wide world of opportunities.”

Global X ETFs has 11 investment products that cover this ‘thematic’, including the newly brought to market Global X Artificial Intelligence ETF (GXAI) and the Global X US Infrastructure Development ETF (PAVE).