Aviva Investors
Far from the fadding crowd: A different approach to global equity income
By Richard Saldanha, Fund Manager at Aviva Investors
While the boom in artificial intelligence continues to grab headlines, Richard Saldanha explains why global income investors shouldn’t ignore opportunities in less-fashionable sectors.
There is one clear winner: the semiconductor sector. It provides the "nuts and bolts” that help the likes of Microsoft, Amazon, Alphabet and Meta grow. ChatGPT and other generative AI platforms all need enormous amounts of computer processing power, which is enabled by chips produced by semiconductor companies.
One example is Nvidia, whose share price has rocketed. Although Nvidia does not pay dividends, there is a long list of other companies in the semiconductor sector that might reap the benefits of AI, some of which may be of interest to income investors.
Take Broadcom in the US, which develops and supplies semiconductor and infrastructure software. The company manufactures “custom silicon” components – specifically designed processors that meet specific customer requirements – which are the elements that go into high-powered AI computing chips. Broadcom’s biggest customers include Alphabet and Meta, who are the forefront of AI innovation. With the huge uptick in demand for these chips, its AI-related revenues are expected to double over the next year, and this is reflected in the substantial rise in its share price. The company also pays a healthy dividend, which has grown around 20 per cent in the last five years.
NXP Semiconductors is another example – the company design chips that go into a variety of different end markets, from automobiles through to industrial processes as well as smartphones. There is significant scope for machine-learning in areas such as automotive safety, as well as powering smart homes and cities.
Another interesting area is storage. We see demand for data storage increasing, along with demand for electricity and further investment in the grid. Within industrials, companies like Schneider and Siemens that can help with the infrastructure for huge data centres and grid networks, or with power generation to meet the increased demand for electricity, should also benefit.
Companies that have traditionally proved defensive and resilient, such as those in the healthcare or consumer staples sectors, are being overlooked as investors rush to invest in technology names. These firms delivered solid earnings and dividends last year in a volatile environment, in no small part due to their pricing power and ability to offset inflation.
Given there are still question marks over whether we are heading into a recession, they deserve more attention. With plenty of risks still out there, now is the time to look for companies that have proven their ability to navigate volatile markets, generate stable cashflows and pay consistent dividends, which should provide significant value over the long term.
This is probably more of a 2024 story and will have significant implications, particularly for US industrials, which are providing solutions around energy efficiency as well as investment into grid networks such as electrical equipment manufacturer Hubbell.
Reshoring is also something to keep an eye on. Through this process, we expect increased spending on automation, as companies bring manufacturing operations back onshore.
There is noise about a similar stimulus package in Europe, particularly given the tax and spending incentives in the US. We will likely see a policy response from Europe, which could be meaningful for industrial companies like Schneider and Siemens that have a key role to play in terms of electrification and industrial automation.
It means you can take advantage of opportunities outside of crowded trades. We do not think about benchmarks when constructing a portfolio; our focus is on delivering resilient income and capital growth.
Take the AI trade and popularity of Nvidia as an example. It represents a significant portion of the global benchmark index but pays no dividends and is therefore not suitable from an income standpoint. While a few big tech names have driven benchmark returns this year, other companies can also participate in long-term secular growth stories, such as those in the semiconductor sector. Our focus remains on parts of the market where we see resilience and have good visibility on income streams.
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Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.
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475501 24/08/24
