00:00Weili, characterise this earnings season for us. We've seen some massive disappointments even if companies did surprise to the upside
00:07and some massive out performances even when companies just did what they're supposed to do.
00:15That's right. Good morning. What we have seen so far in the earnings season is that the sellers of scarcity
00:23are doing much better than buyers of scarcity.
00:27But the bigger picture remains that earnings expectations are very strong and elevated. So expectation for 26 this year, earnings
00:39growth for S&P 500 has grown to 25 percent from just 18 percent three months ago.
00:47So momentum is very strong, but increasingly it's not just about kind of the levels, but also durability of earnings,
00:55which is why kind of looking just beyond the next quarter is important, especially in the context of some of
01:02the cheaper models also becoming very good,
01:06potentially impacting the economics of AI and also how rent can be captured, especially in the intelligence layer.
01:14So specifically for this earnings season, I am looking for earnings durability. I'm looking for companies' commitment for capex, but
01:21also how they balance that with discipline, capex discipline.
01:25And also importantly, in the face of cheaper models becoming very good, how management is dealing with cost pressure and
01:34cheaper model deployment and also in particular AI sovereignty, which is becoming a bigger consideration.
01:40Yeah, absolutely. I think that's definitely going to be the next question.
01:45Wei, when will we know whether hyperscaler returns justify the capital outlay? Is there a company that will elucidate that
01:52for us or a subsector of the AI trade?
01:57I think we don't know yet because it does take time for investment to then lead to new revenue creation,
02:05which is why in our media outlook, we try to focus on the scarcity, the bottlenecks, rather than betting on
02:14winners and losers.
02:16But for this earnings season, we are paying attention to revenue creation, earnings sustainability too.
02:23We are looking at cloud revenue to get a sense, a hint of if some of the investment is paying
02:30off.
02:30But the bigger question about all these close to trillions of AI capex spend, when they are going to bear
02:38fruit?
02:38I think it's just slightly too early to say, which is why we are betting on the infrastructure layer, because
02:45even as models become cheaper, accelerating adoption can still create additional demand.
02:53But also, again, AI sovereignty, companies and countries wanting to have greater control over their own AI, wanting to rely
03:01less on foreign infrastructure.
03:03All of that leads to greater demand for infrastructure, which is how we want to play this.
03:08Well, Wei, the thing about scarcity is that it's only scarcity if demand outstrips it or close to outstrips it,
03:16right?
03:17And I feel like an investor has to really have the faith that these companies will see the pledges delivered
03:23upon, right?
03:24Open AI and anthropic pledges.
03:26I mean, will that happen?
03:28You know, could there be a problem down the road where those commitments aren't actually met in the end?
03:35There is definitely a risk on the table.
03:38Right now, we're still in an environment where there are multiple scenarios, each very different from each other.
03:46They're all on the table.
03:47We call this environment a polyfocated environment, which is different from before, where, yes, we have multiple scenarios on the
03:55table, but they follow a bit of a central case.
03:57Right now, there's no central case anymore with AI transformation and some of the other mega forces.
04:04So one thing that we are paying attention to going beyond just this earnings season is the revenue ramp of
04:10this leading model labs.
04:13You know, like we have seen incredible eye-watering revenue ramp, increasing ARR from likes of the anthropic and open
04:21AI.
04:22Earlier this year, momentum continues.
04:25If that continues, it's going to be key, especially in the context of cheaper models, open source models becoming also
04:32very good.
04:33So the risk of commoditization is indeed important in terms of revenue capture for this model labs.
04:40But again, that impacts more on the rent capture of the intelligence layer rather than questioning the whole AI thesis,
04:51the infrastructure build.
04:53And that layer we do not think is impacted by more models coming online that are also becoming very good.
05:00Wait, I have to ask you about yields, right?
05:02Because even you are so positive stocks in spite of what you call a fragile world, right?
05:07There are so many challenges out there.
05:09Tariff risks are back.
05:10War risks are absolutely back just in the last week.
05:14The oil process shock, obviously, has a trickle down from that.
05:17And we've seen yields pretty much skyrocket, right?
05:21I mean, at their highs of the year and maybe even two years for some parts of the curve.
05:25And it's not enough to entice investors back.
05:28Investors seem to be still looking at the AI trade, as are you.
05:32Explain to me why that makes sense.
05:36Yeah, so this is really interesting and delicate.
05:40So I always get a bit nervous heading into summer because investors want to square their book and liquidity is
05:46a bit thinner.
05:47So these are the technical factors that could drive market volatility.
05:50But in the rates space, it feels that it is more than just the technical factors that are driving yields
05:58spiking higher and volatility increasing.
06:01It feels a little bit more fundamental.
06:03And it's really the result of the two developments that you talked about.
06:08One is this prolonged supply disruption leading to higher inflation expectations and higher rates.
06:16And the other one is AI build out increasing competition for capital, pushing up rates, not only nominal rates, but
06:23also real rates.
06:25So what we have seen in the rates yield space feels more fundamental.
06:31And this is something that we have been talking about for a while, the increasing competition for capital, pushing up
06:37real yields.
06:38So that is happening now.
06:40And we actually think that there may be more to go.
06:44It's a great place for income.
06:47So durable income is going to be an even more durable theme in portfolio.
06:51But definitely this is why we have preferred equities over government bonds.
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