AI Story is Now About Cash Flows: Hoffmann-Burchardi

Bloomberg

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00:00let's get to that price target what's the road towards 8k so what we believe is that the macro

00:06headwinds that we were facing in 2025 are actually turning into tailwinds in 2026 we have that dual

00:12engine of both fiscal and monetary policy stimulus in particular in the first half of next year we

00:19have of course on the one hand now the rate cuts typically hitting with two to three quarters of

00:24transmission then we have the refunds from the one big beautiful bill and we also have more

00:30investments into infrastructure and defense so that's a very supportive fiscal environment and

00:36then we think inflation is also going to be rather contained we have three disinflationary forces in

00:41our mind that we are seeing one we are going to anniversary the tariffs in april and then we have

00:46what we think is going to be slower wage growth because of the slack in the labor market and then

00:51also finally shelter inflation coming down so with that benign backdrop to inflation we also think

00:57there may be one more rate cut in the books for december but again if not december then january

01:02and ultimately as you said it's the terminal rate that matters and not necessarily a one month delay

01:08you just offered us the ingredients for year-end melt-up but it's not materializing how would you

01:12describe what's developing before our eyes right now in the last few days the last few weeks

01:16yeah i think the key question right now is really about ai and in our mind the ai story has

01:24significantly changed it's no longer about compute it's about cash flows and at the latest in the

01:30third quarter microsoft earnings we learned that some of the big private companies that are offering

01:35intelligent services i actually still have any loss making and the question is will they generate

01:41enough cash flows to pay for all these commitments to infrastructure and at the same time what we're

01:48seeing is that the benefits of ai are going to actually be accrued by companies that are using ai

01:54and i think that warrants a new playbook on ai investing so does this really mark the shift i mean is

02:00this the turning point that you see a new playbook as coming into play for lack of a better word

02:06uh as people look to who's taking on this new technology and deploying it in a way to increase

02:12their efficiency yes if we look just at the last three years we're almost getting close to the

02:17three-year anniversary of chad gpt um we have seen that those ai7 those enablers the nvidia's the

02:25broadcoms and eams microns and then also the hyperscalers that they have roughly um gained about

02:3110 trillion in market value over three years yet the ai users haven't really appreciated as much

02:37and so for us this is now the opportunity to pivot and invest in those companies that use ai for

02:43advertising for coding for automation of business processes and we particularly think that the

02:50healthcare sector is a really interesting way uh to actually play ai so does this mean that you're

02:55going to see that rotation out of some of these big big cap large cap tech companies and into things

03:02like healthcare things like financial sector things like walmart as we saw yesterday as they

03:06renamed themselves as a tech company or do you see this as potentially everything goes up or the index goes

03:13down but you see some winners in the bunch at the minimum we think or we suggest that you diversify

03:19that ai monetization risk a bit um the math can work of course there's some path to that that math

03:25working but at the same time there is a lot of uncertainty out all these private companies

03:30really going to make it and i think for us this is an opportunity to just broaden out our exposure

03:35to ai and and rethinking how we want to invest in this we don't think ai is a bubble the technology

03:41is not a bubble technology is real the roi is tangible but we want to now again expand our investment

03:49universe of how to capitalize on this new technology when you look at capitalizing on it and you look at

03:54the adopters you're interested in say healthcare other industries does that mean job losses

03:59not necessarily i think it could also be of just doing more of what we're doing or doing it faster

04:06and more cost efficient you know in healthcare in particular the cost of bringing a drug to market

04:11has risen exponentially over the last few years and decades and so ai can bring down that cost curve

04:19from clinical trial or drug discovery all the way to clinical trials and i think this is a big

04:24opportunity uh for that sector to to drive better operating efficiencies we've had a few of these

04:29conversations now yeah and we often spend about 10 minutes with a guest and i would say about 80 percent

04:34of it is on the stuff we just discussed and hardly any of it's on federal reserve and interest rates

04:39now we've just seen the market with a big turnaround this morning at least and lisa's pointed out how

04:43viciously things have changed in terms of expectations makes me wonder just how relevant

04:47you and the team think monetary policy might be to the outlook and how relevant it is for stocks going

04:52forward no we think it's relevant we actually use three perspectives in our equity framework which

04:57is macro which the fed of course plays a big role in we use also the bottom-up fundamentals so

05:02valuation right that's a big part of our process but also these structural trends like ai electrification

05:08and longevity uh which for us determine asset prices so for us all three perspectives do matter

05:13sometimes the market decides to focus on certain areas of these three lenses and i think as an

05:19investor used to have to stay attuned to where the market is currently focused and pivot but all three

05:25are very relevant of course over the last three years it's been all about ai and in particularly

05:30about ai enables it has been totally dominant that's for sure which is the reason why it's hard to

05:35understand whether that hurts or helps the fed's case to cut rates because ultimately what people

05:39are saying is if the fed cuts rates more significantly that helps the valuation story uh proposition the

05:44multiple story for ai stocks but if they don't then what does that do for the rest of the economy i mean

05:51there's so many questions here which is the reason why you see the existential angst for a lot of these

05:55fomc members about igniting a bubble in financial markets in order to help cater to the weakness that

06:02they're seeing in the labor market this is a conundrum that they're going to have to grapple

06:06with but they only have a dual mandate you've got 25 penciled in for december another rate cut

06:11we have two more rates cut canceling and really the reason as you said is the weak labor market and

06:16all the alternative data that we have been seeing we now obviously have to wait until december 16th

06:21to know more about the labor market but the data suggests that the labor market is still weak and we

06:26think we have two more cuts it just seems ridiculous it doesn't need to be this way just change the date

06:30it really doesn't and i think if you do it immediately it won't be it won't be seen as

06:34political it will just say we want the most data we can have before we make a decision i think everyone

06:39would welcome that ask governor myron in 20 minutes time let's move the date move the fed meeting or

06:44rika this is great it's good to see you thank you

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