How is Europe powering the AI innovation wave?
29 AUG, 2024
Artificial intelligence continues to be a major theme in global markets. The revolution that AI will generate, along with its applications, and above all, how it is being fuelled, keep the market very aware of its progress.
Recent months have seen an extraordinary wave of AI innovation announcements, with some rivalling the impact of the iPhone’s debut. In this article, Anis Lahlou, CIO of European Equities at Aperture Investors, part of Generali Investments, explains how European equities continue to benefit from the continent’s diverse role as a collaborative driver within the AI ecosystem.
Author: Anis Lahlou, Portfolio Manager and CIO European Equities Aperture Investors, part of Generali Investments
Q2 Update: Inflation sways, while equities weather election shock
European equities have been resilient despite the backdrop of economic uncertainty and political turbulence induced by the surprise French elections. Despite inflation concerns and electoral shocks, European indices achieved modest gains, with the MSCI Europe Net Total Return index returning 1.32% in euros in Q2.
As for inflation, the pendulum of worries about sticky inflation data kept markets on edge early in the quarter. However, as per the recent pattern, later data in the quarter showed that the economy’s soft landing should broadly remain on track, with the ECB in June announcing its first rate cut since 2020, lowering the deposit rate by 25bp to 3.75%, aiming to stabilize economic growth and market sentiment.
AI agents have arrived
Most importantly in our view, the AI boom accelerated in recent months, marked by a flurry of ground-breaking announcements from tech giants and start-ups alike. Of particular note is the emergence of AI agents and micro-agents, heralding new capabilities in reasoning and planning that is reminiscent of the revolutionary impact of the iPhone’s debut.
So, what are AI agents and micro-agents? As OpenAI’s GPT (Chat GPT) explains: “AI agents are autonomous programs designed to perform specific tasks or solve problems using artificial intelligence, while micro agents are smaller, more specialized AI agents that focus on narrowly defined tasks within a larger system.”
OpenAI’s GPT-4o, Google’s Gemini 1.5 Flash and Project Astra, Microsoft’s Copilot Plus PCs, Anthropic Claude 3.5 Sonnet, and Apple’s Intelligence initiative, each represent leaps in AI technology. These advancements introduce emotion recognition, real-time translation, and seamless AI integration into hardware, software ecosystems, and daily apps.
Meanwhile, Nvidia’s NIMS (Nvidia Inference Micro Services) is democratising a full infrastructure of agents through their micro agents, potentially catalysing widespread AI agent deployment across industries. We are watching this space closely.
AI Acceleration: The new normal
With equity markets soaring and five major tech companies driving performance, the sustainability of this rally is a key debate. But to take one of these companies, Nvidia, they have fundamentally shifted from a gaming GPU company to an AI factory powerhouse that is poised to capture the lion share of the $1 trillion datacentre market opportunity.
We anticipate AI innovation to accelerate further. While Moore’s Law predicts computing power doubling every two years, the CPU to GPU shift is outpacing this. Model optimization yields 10-10,000x improvements over a model’s lifetime, suggesting potential 10-30x capability enhancements in the near future.
This may also explain the recent flood of AI announcements and may become the new norm that we have to get used to! In our view, this means growth will not be contained to Nvidia alone or just a few “Magnificent Stocks” in the US.
The AI opportunity in Europe
Whether in healthcare, media, or other industries, AI’s impact extends far beyond technology companies. Europe’s data-rich environment, its role as a manufacturing powerhouse, and its diverse industries make it extremely positioned it well to harness AI’s potential. Innovation is not just about “tech companies” in Europe; it’s about traditional industries embracing innovation and integrating it into their DNA. They’re not just finding applications for AI; they’re embedding it, becoming smarter, and more efficient.
We continue to see the AI boom significantly benefit stock picking in European equities, particularly in the semiconductor and semiconductor equipment ecosystem, and more broadly in all manufacturing and services industries, healthcare, and small caps.
In the case of one European semiconductor manufacturer, for example, their next generation extreme ultraviolet lithography technology (which enables a dramatic increase in the density and precision of microchip patterning), relies on specialised European suppliers to provide critical components like vacuum gauges and high performance valves. These components are integral to maintaining the precise conditions needed for EUV lithography.
This network of innovation underscores Europe’s crucial role in the AI computer ecosystem, reinforcing the idea that just as generative AI is unimaginable without Nvidia, it is equally dependent on semiconductor manufacturers and their collaborative European infrastructure.
Outlook
In addition to AI, innovations in obesity management drove stock selection, with biotech and pharmaceuticals performing well year to date.
Looking ahead, while inflation concerns and French elections caused short-term volatility, we believe these issues will resolve over time, similar to past political shifts in Italy and the Netherlands. The upcoming US election may bring additional turbulence in Q3.
We want to balance our focus to take into consideration large opportunities: the potential from cash deployment as interest rates normalise is massive.
As we navigate market shifts, our strategy remains clear: capitalise on Europe’s innovation, embrace AI, and stay attuned to macroeconomic trends.
