Thematic Mid-Year Update: What’s Next For AI And Geopolitics

Originally published on June 24, 2024

By Jay Jacobs

As the AI buildout propels a potentially historic capital expenditure cycle, investors could be poised to unearth opportunities across industries amid greater geopolitical fragmentation.

Jay Jacobs, U.S. Head of Thematic and Active ETFs at BlackRock

Looking for Opportunities Beyond Today’s Leaders

U.S. and international equity markets have demonstrated resilience, flirting with all-time highs, despite significantly reduced expectations in the number of Fed rate cuts in 2024 and lingering inflation worries.

This performance, however, has been narrowly concentrated at both the stock and sector levels, including in AI, tech, and emerging markets. We believe investors may want to look beyond today’s market leadership to find underappreciated areas that may be well-positioned to benefit from powerful secular tailwinds, or mega forces, that can drive long-term growth.

In a market characterized by greater dispersion, equity investors can look beyond recent market leaders to pinpoint beneficiaries both within and beyond mega-cap tech and AI.

Jeff Shen, PhD, BlackRock Systematic Equities Co-CIO

In the short term, we believe two mega forces have the potential to reshape the global economy and could reach critical inflection points:

1. The transformative potential of Artificial Intelligence (AI) and its catalyzation of a historic cycle of capital expenditure.
2. The growing impact of geopolitics on trade and technology amid a wave of elections globally.

In our Thematic Mid-year Update, we focus on these two mega forces and highlight where we believe the most compelling opportunities lie. Within AI, we look to the ‟picks-and-shovels” of this technology amid tremendous demand for hardware, digital infrastructure, and power. Within geopolitics, we look to potential beneficiaries of changing supply chains, including a domestic focus on tech and manufacturing, as well as emerging market up-and-comers.

Artificial Intelligence (AI): A Picks and Shovels Approach

AI has transcended “buzzword status,” with businesses across all sectors looking to quickly integrate the technology. It’s estimated that over 80% of enterprises will have used generative AI by 2026, up from less than 5% in 2023, noting the technology can both improve efficiency and enhance products & services.¹

Companies have different AI platforms to choose from (ChatGPT, Claude, etc.), but virtually all paths of greater AI adoption are set to accelerate demand for the underlying infrastructure that powers the technology or the “picks and shovels” of the AI industry: data centers, semiconductors, and certain raw materials.

We are facing what may become one of the largest infrastructure efforts in world history, driven by the explosive growth of AI adoption. There is immediate and tremendous demand for data centers that must be built with AI workloads in mind, and the computing power and data storage necessary to support AI’s growth.

Jensen Huang, CEO of Nvidia (NVDA), estimates that the shift from general-purpose computing to accelerated computing is expected to require at least $1 trillion of investment if not more, and believes we are only 5% into this buildout.² In our view, the market is underestimating the amount of money that will be spent on the development of data centers over the next 5-6 years.

2023 marked the onset of a new industrial revolution. We are now building ever-larger AI factories to manufacture intelligence. This buildout phase is only in its second year and I expect it to continue throughout the decade, to become the largest infrastructure investment in history.

Tony Kim, BlackRock Head of Fundamental Equities Global Technology

The potential beneficiaries of this historic capex cycle are vast, ranging from operators and suppliers of data centers to a broad range of semiconductors, as well as electric power infrastructure and critical materials.

Worldwide AI Chips Revenue is Expected to Jump to $71 Billion in 2024, a 33% Surge From 2023³

Markets and headlines have largely focused on one type of semiconductor critical to AI called a Graphics Processing Unit (GPU), which performs complex computations in parallel. GPUs are crucial for training large language models or (LLMs), like ChatGPT.

GPUs are not the only type of chip that may benefit from broader AI adoption, other types of semiconductors or “chips,” along with their equipment and packaging, all play a critical role in the AI ecosystem and are potential beneficiaries.

We believe, the AI opportunity is bigger than just one semiconductor company. The industry is projected to reach $1 trillion in revenue by 2030, with computing and data storage driving 25% net growth.⁴ As such, the broader semiconductor sub-industry could be well-positioned amid this AI capex ramp up.

The global semiconductor industry is projected to reach $1trillion in revenue by 2030

Global semiconductor market value by vertical, $B

Source: McKinsey. “The semiconductor decade: A trillion-dollar industry”, as of April 1, 2022. CAGR refers to the compound annual growth rate (%). For illustrative purposes only. Forward-looking estimates may not come to pass.

Chart description: Bar chart showing that by McKinsey estimates, the global semiconductor industry is projected to become a trillion-dollar industry by 2030, largely driven by the automotive, data storage, and wireless segments.

Power infrastructure may need an overhaul to keep up with AI energy demand.

AI data centers cannot support the growth of the technology without another crucial input, power. Data centers need an abundance of inexpensive electricity to run powerful servers and keep them cool. Critical IT power is defined as the usable electrical capacity at the data center floor which is available to computer servers and networking equipment that is housed within the server racks.

The chart below shows a measure of the power capacity available to U.S. data centers (in megawatts). Critical IT capacity in the U.S. will need to triple from 2023 to 2027, and surge well beyond, to keep pace with rising demand – with the vast majority driven by AI’s arrival.⁵

The use of power toward Al data centers is expected to grow rapidly

Global data center critical IT power (megawatts–MW)

Source: semianalysis.com, “AI Datacenter Energy Dilemma – Race for AI Datacenter Space”, as of March 13, 2024. For illustrative purposes only. Forward-looking estimates may not come to pass.

Chart description: Bar chart showing the use of critical IT power in megawatts broken out by AI data center usage and non-AI data center usage. The AI data center usage is increasing over time and is estimated to triple from 2023 to 2027.

All of this means we may see a demand for power not experienced since the dotcom boom, that’s because along with AI’s rise, other power-hungry themes are emerging like electrification, Electric Vehicles (EVs) and a potential resurgence in US manufacturing (driven by reshoring). Adding energy production capacity, improving power transmission, and scaling energy storage solutions will be key to meeting this resurgence in energy demand.⁶

Investors interested in the AI theme may consider the iShares Semiconductor ETF (SOXX), the iShares US Digital Infrastructure and Real Estate ETF (IDGT), and the BlackRock Technology Opportunities Fund (BGSIX).

Copper could be the chokepoint for meeting demand for energy infrastructure and digital infrastructure.

Copper is an essential input to many aspects of energy infrastructure as well as digital infrastructure. Copper demand is growing rapidly; it’s projected to rise nearly 20% by 2030 from 2023 under the IEA’s Stated Policies scenario⁷, which is based on the current policy landscape. While clean energy applications are expected to be the biggest drivers of copper demand growth, data centers will also play an important role.

Yet despite several secular tailwinds driving copper demand growth, supply growth remains anemic. World copper mine production is growing slower than expected, as it takes on average 10-20 years to permit and build a new copper mine.⁸

Persistent copper supply deficits could become a chokepoint for AI’s growth if energy infrastructure is unable to keep up with soaring power demand due to a lack of copper. JPMorgan forecasts that the additional power consumption required by data centers could add another 2.6 million tons, to an already 4 million metric tons deficit by 2030.⁹

Investors interested in copper may consider the iShares Copper and Metals Mining ETF (ICOP).

Geopolitics: Tech and Supply Chains at the Center of a Global Election Year

Geopolitics is increasingly important to the global economy especially in a year where countries representing half the world’s population are holding elections.Domestic and foreign policies have rapidly reshaped supply chains, with technology and manufacturing drawing the lion’s share of attention amid intensifying global economic competition.

Dispersion is accelerating for U.S. technology stocks at the intersection of innovation and geopolitics. Evolving dynamics in globalization and industrial policy have the potential to disrupt years of established hiring practices and growth strategies.

Linus Franngard, BlackRock Systematic Equities Portfolio Manager

The U.S. technology sector is highly globally-dependent, deriving large parts of its supply chains and nearly 60% of its revenue overseas¹⁰. Given its exposure to economic and national security, the technology sector is increasingly caught in the crosshairs of rising geopolitical tensions.

Tariffs, export bans, and corporate fines are becoming commonplace between economic blocs as AI, data privacy, and semiconductor supply chains become increasingly important to economic policy and politicians platforms. As such, we are seeing a clear dispersion forming between tech firms that are more exposed to geopolitical risks and those who aren’t.

One way to measure exposure to geopolitical risk is to look at company hiring practices. In the chart below, we highlight global job postings by American tech companies. The yellow bars represent the firms with the most U.S. -centric job listings, and the purple bars represent the firms with the most international hiring practices.

Over time, we see a clear and growing divide between tech firms that hired abroad and those who invested in maintaining a U.S.-focused workforce. In our view, this gap reveals a potential investment opportunity focused on identifying companies driving domestic self-sufficiency and mitigating geopolitical risks.

In addition, we believe these firms with more U.S. centric hiring are potentially poised to benefit more from government support, such as tax credits or government contracts, vs. their more globally exposed peers.

Widening gap in international hiring trends of U.S. firms (2016-2024)

Historical percentages of jobs posted abroad

Source: Burning Glass Technologies, as of June 2024 using data as of May 2024. For illustrative purposes only.

Chart description: Bar chart showing U.S. tech firms with the most U.S.- centric job listing, and the firms with the most international hiring practices, highlight a clear and growing divide over time between firms that hired abroad and those who invested in maintaining a U.S. focused workforce.

Investors interested in tech independence may consider the iShares U.S. Tech Independence Focused ETF (IETC).

Looking beyond tech, manufacturing is enjoying a renaissance in the United States as policy efforts to “reshore” production are yielding powerful results.

Since the pandemic, the U.S. has implemented several policies to increase domestic production and reduce reliance on global supply chains. These policies, which include the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips and Science Act, are expected to lead to well over $1 trillion in spending¹¹ to rebuild infrastructure, support high-growth industries like EVs, and secure supply chains for key technologies like semiconductors.

Reshoring is the process of bringing production or manufacturing back to the country of origin, previously outsourced to other countries. By bringing manufacturing back to the U.S., the risks of unstable supply chains, shipping delays, poor product quality, and trade tensions could dramatically decrease.

Tony DeSpirito, BlackRock Global Fundamental Equities CIO

While government stimulus often aims to drive domestic economic growth, reshoring policies may also increase the resiliency of the U.S. economy, via the reskilling of the manufacturing workforce, enhancing the quality and safety of products, and reducing the potential impact of geopolitical tensions on our ability to procure vital goods.

Total construction spending in manufacturing in the U.S. has increased 4X since 2014

Source: Federal Reserve Economic Data, “Total Construction Spending: Manufacturing in the United States, Millions of Dollars, Monthly, Seasonally Adjust Annual Rate”, as of May 2024.

Chart description: Line chart showing total construction spending in the U.S. in millions starting in March of 2014 through March of 2024, with the amount increasing 4x over the time period.

Regardless of the outcome in this year’s presidential election, the reshoring trend could accelerate through increased tariffs, government spending, or both. “On trade, presumptive Republican nominee, former President Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods,” according to the BlackRock Investment Institute.

Presumptive Democratic nominee, President Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls.¹²

Investors interested in capturing the themes of U.S. manufacturing and reshoring may be interested in the BlackRock Large Cap Value ETF (BLCV), which is actively managed by Tony DeSpirito and the BlackRock Income & Value team.

The intersection of trade policy and youthful demographics could spur emerging market (EM) opportunities

Outside the U.S., trade policy and rewiring supply chains are creating new opportunities in select emerging markets. Among those countries positioned to potentially benefit are Mexico and India.

Mexico remains the U.S.’s top trading partner, benefiting from geographic proximity, strong manufacturing-based economy with competitive labor costs, and increased supply chain integration with the U.S. The June election of Claudia Sheinbaum, as Mexico’s president could signal a continuation of recent deepening trade ties to the U.S. given that she comes from the same political party as Mexico’s outgoing incumbent.

Similar trends are occurring in India where the labor pool is deepening its ties with the U.S. Boosted by a large, youthful, English-speaking working population. As a result, both India and Mexico have experienced GDP growth at a higher rate in the past three years than in the previous decades.¹³

While near-term growth may be driven more by policies surrounding rewiring supply chains, demographics could become a primary driver of long-term economic growth in these countries.

By 2050, China’s share of working age population could see a significant decline to below 60% from 73% seen in early 2010s, as evidenced in the chart below.¹⁴ Other EM countries like India, Indonesia, and Mexico may see both population growth and a more stable composition of working age population over the next few decades.

This divergence is highlighted in the below chart, showing that demographics will play an increasingly important role in supply chains and trade relationships as developed markets like the United States, Europe and Japan continue to age and see slowing workforce growth.

Investors interested in exposure to the theme of Emerging Market supply chains and demographics may be interested in the iShares Emerging Markets Ex-China ETF (EMXC).

Shifting population landscapes in emerging economies

(working-age population as % of total population)

Source: Reuters Refinitiv, data based on 2023 OECD Labour Force Statistics.

Chart description: Line chart showing the working-age population as a % of total population in India, China, Brazil, Mexico, and Indonesia. Highlighting a diversion in demographic trends over time. For illustrative purposes only. Forward-looking estimates may not come to pass.

Conclusion

The vast acceleration we’re seeing in AI along with the impact of elections around the world are real catalysts presenting potential investment opportunities, ranging from the picks and shovels being used in the AI buildout, to the reshaping of global supply chains. Thematic strategies, using a tailored construction process in each theme’s value chain, may allow investors to capture the tailwinds of mega forces that are reshaping our global economy.

© 2024 BlackRock, Inc. All rights reserved.

¹ Gartner, Catherine Howley, “Gartner Says More Than 80% of Enterprises Will Have Used Generative AI APIs or Deployed Generative AI-Enabled Applications by 2026.” As of October 11, 2023. Forward-looking estimates may not come to pass.

² The Motley Fool, Nicholas Rossolillo, “Nvidia CEO Jensen Huang Says “A New Computing Era Has Begun- How Much Higher Can the Stock Fly”. As of August 27, 2023. Forward-looking estimates may not come to pass.

³ Gartner, “Gartner Forecasts Worldwide AI Chips Revenue to Grow 33% in 2024.” As of May 29, 2024. Forward-looking estimates may not come to pass.

⁴ McKinsey & Company “The Semiconductor decade: a trillion-dollar industry” as of April 1, 2022. Net growth calculated based on total revenue of $590B in 2021, with a $125b growth in revenue of computing and data storage from 2021 to 2030, accounting for 25% total net growth of the global semi market at $475B. Forward-looking estimates may not come to pass.

⁵ Semianalysis, “AI Datacenter Energy Dilemma- Race for AI Data Center Space.” As of March 13, 2024.

⁶ Goldman Sachs, “Generational Growth- AI data centers and the coming US power demand surge.” As of April 28, 2024. Forward-looking estimates may not come to pass.

⁷ IEA, “Global Critical Minerals Outlook 2024.” Page 263. As of May 2024. Forward-looking estimates may not come to pass.

⁸ Reuters, Ernest Scheyder, “Copper Industry warns of looming supply gap without more mines.” As of April 21, 2023. Forward-looking estimates may not come to pass.

⁹ WSJ Pro, Joseph Hoppe & Chrisan Moess Laursen, “AI Siphons Copper Supplies Needed for Green Transition.” As of June 6, 2024. Forward-looking estimates may not come to pass.

¹⁰ Source: BlackRock, Aladdin Explore, using revenue breakdowns from the S&P 500 index as of 4/30/2024.

¹¹ U.S. Department of transportation, “Bipartisan Infrastructure Law (BIL) / Infrastructure Investment and Jobs Act (IIJA). Illustrating the IIJA act alone authorizes over $1 Trillion.

¹² BlackRock Investment Institute, “What we’re watching in 2024 elections.” As of June 10, 2024.

¹³ International Monetary Fund, “GDP per capita, current prices.” As of May 2024.

¹⁴ Reuters Refinitiv, data based on 2023 OECD Labour Force Statistics. Forward-looking estimates may not come to pass.

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This post originally appeared on the iShares Market Insights.