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AI Investments Beats Broad Market Performance

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

By the end of 2023, Artificial Intelligence (“AI”) had become a powerful buzzword in the markets and for good reason: an increasing amount of corporate spending has been in incorporating AI into their operations and offering. AI-driven services are increasingly more adaptable to identifying (as well as replicating) patterns in data of multiple varieties while also potentially offering the means to automate services, thereby reducing human operator costs.

The benefits of AI have also percolated into the public sector, which usually tends to be slower on the uptake. For instance, a recent analysis by the think tank Brookings1 shows that between 2022 and 2023, the U.S.’ Federal government had spent almost $4.5 billion on AI, with nearly 90% of contract value within the Department of Defense.

An increasing number of vendors have been working with the government in the deployment of AI-driven solutions, with American “pure play” AI solutions provider Palantir (ticker: PLTR) occupying the largest share of the pie by some margin.

Given the near-universal adoption of AI-driven services with immense growth potential, it’s no wonder that market participants have been piling up conviction into stocks with high “AI-relevant” exposure. It is entirely feasible to create a “basket” of stocks that capture most major aspects of AI adoption within a limited number of stocks.

Building an “AI” Basket

AI services aren’t just about the algorithm. Effective deployment is often predicated on an effective processor. While microchip development has increasingly centered around AI-relevant architecture, there are a few industry leaders in the present: Nvidia inc (ticker: NVDA), Advanced Micro Devices Inc (ticker: AMD), and Qualcomm Inc (ticker: QCOM) are widely considered to be running at the forefront of AI-relevant hardware design while Taiwan Semiconductor Manufacturing Company Limited (TPE ticker: 2330) is presently considered to be the world’s most prominent foundry for the manufacturing of microchips. Intel inc (ticker: INTC), meanwhile, can be considered as both designer and manufacturer – around 75% of Intel’s chips are manufactured in fabrication plants in Oregon and Arizona. Similarly, Arm Holdings (ticker: ARM) is a British semiconductor and software design company increasingly catering around an AI strategy.

On the “algorithm” side of the business, Big Tech is very prominent: Amazon Inc (ticker: AMZN), Microsoft Inc (ticker: MSFT) and Alphabet Inc (ticker: GOOGL) offer “on-demand” cloud-based computation platforms and infrastructure to corporations while Alibaba (ticker: BABA) does the same predominantly in China. Apple (ticker: AAPL) doesn’t currently have an AI offering yet, it incorporates AI extensively in its products and is expected to make some major inroads via a new “AI strategy”2 in 2024. Similarly, Meta Inc’s (ticker: META) Meta AI is working on developing various forms of artificial intelligence, developing augmented and artificial reality technologies. Another prominent (and arguably the most secretive) AI services provider is, of course, Palantir.

“Basket” Performance versus the Market

Given the price performance of many of these tickers tend to be rather extreme on many an occasion, a time-tested approach to handling this would be to weigh each of these stocks (or their American Depositary Receipts) equally. Each of these tickers – one per company – would thus have a weight of approximately 7.69%.

In the Year Till Date (YTD), the price performance of this equal-weighted “AI” basket versus the broad-market S&P 500 (ticker: SPX) and the tech-heavy Nasdaq-100 shows the former having a clear and massive lead.

Source: Leverage Shares analysis

It didn’t take long for the “basket” to begin its massive outperformance: after 8 days where markets were open for trading, the basket goes from largely following the indices to piling on performance that far outstrips them. Both crests and troughs in the market indices tend to be highly amplified in the “basket”, which is the first indicator as to how heavy market convictions are in “AI-relevant” technology.

For a better sense of conviction, one can also consider constituent-weighted Price to Earnings (PE) Ratios that would be the “effective” PE Ratio for each of these three instruments. An examination of trends here add further nuance to the evolution of investor conviction.

Source: Leverage Shares analysis

On balance, the “basket” tended to underperform relative to the market indices through all of January. The piling of conviction – as shown by the rising PE Ratio performance – begins in earnest after the 7th of February when Arm shoots up on the back of an upbeat earnings release. While Arm’s PE Ratio performance has tended to subside during troughs, they continue to be held when conviction in other constituents of the “basket” rise.

A Basket Ready to Go

The idea of an equal-weighted “AI” basket underpins two of London Stock Exchange’s hottest new Exchange-Traded Products (ETPs). The 3X Long Artificial Intelligence ETP (ticker: GPT3) takes the basket and amplifies its daily returns on the upside by 3 times. For the downside, there’s the -3x Short Artificial Intelligence ETP (GPTS). The basket itself is estimated via the Solactive Artificial Intelligence Index (BBG Ticker: SOLUAI) wherein the constituents are rebalanced on a quarterly basis to provide consistent and rationalized performance.

Given that the basket has amplified crests and troughs relative to broad indices, professional investors will find ample opportunities to capitalise on market convictions in either direction on a tactical basis. Over the course of this year, these ETPs will likely prove to bring some very interesting performance profiles to investors’ profiles. The fact that any potential loss in either of these products is limited only to amount invested and no further (unlike many other products/strategies) certainly helps too.


Footnotes:

  1. “The evolution of artificial intelligence (AI) spending by the U.S. government”, Brookings, 26 March 2024
  2. “Apple announces its big annual conference, where it could reveal its AI strategy”, CNBC, 26 March 2024
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

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