Big Ideas 2024

Scott Helfstein from GlobalX, joined Morgan Stanley’s Head of European Thematic Strategy,  Edward Stanley, to discuss the major themes impacting the industry at the Morgan Stanley 6^th Australia Summit. Both Edward and Scott outlined potential themes that could impact financial markets in one, three- and five-years’ time. 

Historically, analysts have forecasted tech leaps, such as the internet, mobile and cloud technology, on average 38% too low ¹. Edward Stanley suggested that the materials, systems and infrastructure needed to build out data centres and artificial intelligence (AI) capability have been forecasted to be in oversupply in as little as three years. This includes components, manufacturing, networking, optical, models as well as semi-cap equipment. In the near future, there should be ample demand for high bandwidth models, although the cyclical nature of memory could potentially drive excess supply. In the medium term, double booking of orders could drive oversupply, especially if tech spending growth slows. The importance of the PCs and workstations in enabling this growing Edge AI trend has also been noted. General sentiment within the industry expects robotics to play a major role in driving this sub-theme of AI over the remainder of the decade. Nearer term, however, our analysts see the smartphone supply chain as the least well-discounted and most catalyst-rich way to play the theme.

Conversely, Scott Helfstein highlighted the opportunity that exists within the AI ecosystem.

As data centre systems transition to computational infrastructure that can handle AI-first workloads, we expect new opportunities to emerge for disruptive chipmakers. It is projected that AI’s rapid advancement could potentially add US $16 trillion to the global economy by 2030 ². It’s projected that generative AI will enhance labour productivity and could drive higher consumer demand through improved product quality. More so, approximately 60% of all AI-related GDP gains in 2030 will come from increased consumer consumption vs ~40% in 2022. Generative AI-based technology could account for US$1.3 Trillion in spending by 2032 ³. Generative AI growth will be largely driven by training infrastructure in the near term before gradually shifting to specialised software and services over the longer term.

AI implementation benefits cloud infrastructure providers and data solution suppliers. AI services will largely be distributed to consumers through the public cloud ⁴. Data management solutions and applications are essential for enterprises looking to extract insights from large datasets and enhance their offerings. The AI chipset market could be worth more than $200 billion by the end of the decade ⁵. The Graphics Processing Unit (GPU) market is projected to exceed US$247 billion by 2028 and the broader AI accelerator market is expected to approach US$162 billion ⁶. AI accelerators are specialised hardware components designed to compute complex AI and machine learning (ML) algorithms. It is more efficient than the general-purpose central processing units (CPUs). In addition to GPUs, other accelerations include Filed-Programmable Gate Arrays (FPGAs), application-specific integrated circuits (ASICs) and Tensor Processing Units (TPUs). 

Nvidia currently owns a majority of the market share in the data centre acceleration industry but vendors like AMD are making strides. AMD is moving fast to build a foothold and meet the surging AI demand, bringing its new MI300 accelerator chip to the market. There is high growth potential as the AI market is projected to reach US $305.90bn in 2024 with an annual growth rate (CAGR 2024-2030) of 15.83% resulting in a market volume of US $738.80bn by 2030 ⁷. AI is quickly expanding beyond data centres enabling innovative commercial applications in diverse sectors, including agriculture, health care and beyond. Forecasts indicate that over 729mn individuals will use AI tools by 2030, up 254mn from 2023 ⁸. AI spans multiple segments and its most innovative companies include both household names and newcomers from around the world. 

Space, is a microcosm of the twin challenges the Pentagon is wrestling with as it seeks to recapitalize existing systems while introducing new capabilities to address novel threats from competitors⁹. Following the Cold War, US systems in space were largely uncontested, providing the US Department of Defense (DoD) an ability to operate assets free of disruption or threat. Over time, the US migrated assets associated with critical capabilities into space due in part to its status as a haven. During the Gulf War, US reliance on space was on full display, as were the advantages of satellite-enabled networks, overhead surveillance and GPS-supported targeting. By the 2000s, many critical capabilities were reliant on a relatively small number of satellites. The US military and intelligence community has since grown increasingly reliant on Space-based capabilities including communications, navigation, missile warning and surveillance. Few, if any, US military missions today are conducted without the aid of satellites¹⁰.

US reliance on space has not gone unnoticed. Adversaries have sought to exploit this reliance on the space domain and the inherent vulnerability of US space-based systems, aiming to turn space into an Achilles heel for the US. In 2007, China successfully conducted a critical anti-satellite (ASAT) missile test, intercepting a failing weather satellite in Low Earth Orbit (LEO)¹¹. This event marked the beginning of the end for space as a safe haven. In November 2021, Russia conducted a direct-ascent anti-satellite test, destroying a defunct Russian satellite and creating over 1,500 trackable pieces of orbital debris, which could threaten existing systems on orbit. While China and Russia today present the most serious challenges to US interests in space, other nations such as North Korea and Iran are also reportedly developing ASAT capabilities¹².

We see DoD still in the early innings of these efforts and expect the growth trajectory to persist. Our Base Case assumes Space-related spending grows at a ~12% compound annual growth rate for financial year 2023-27 and ~10.1% compound annual growth rate for financial year 2023-30 as the Pentagon overhauls significant aspects of its existing space-based assets and introduces new capabilities¹³.

On one hand, adversary advancements in anti-satellite capability have introduced new risk to existing US space systems and the Pentagon is investing to reduce this vulnerability through satellite redesign and a move toward more resilient constellations. On the other hand, new threats are demanding new capabilities on orbit (e.g., hypersonics missile tracking) and the DoD is building out new architectures in space to address these emerging requirements.

Resilience, reconstitution, and operational assurance have been at the forefront of new system designs as well as the retrofit of select legacy systems. Recognising that today’s large, exquisite satellites present “big, fat, juicy targets” as former head of US Strategic Command Gen. John Hyten put it in 2017, the Pentagon is now embracing proliferated architectures of lower-cost satellites in LEO. The Pentagon has also emphasised the need for responsive launch or the ability to replace downed systems in space in a timely manner.

Kessler syndrome is the hypothesis that as we pass a tipping point of debris orbiting the planet, their collisions with one another will become an unpredictably random chain reaction. With much of this LEO debris travelling at speeds of >17,000mph (10x the speed of a bullet), the damage even debris of 1mm can cause is hard to overstate. The real-world implications of satellite damage (both deliberate and accidental) are:

• GPS - the system is formed of satellites, ground stations and receivers. If the former is damaged then vehicle, aviation, shipping and smartphone navigation will all cease to reliably function.
• Weather forecasting - Polar-orbiting geosynchronous satellites provide the data for our weather forecasts. Damage to these in turn would limit our ability to track hurricanes, wildfires, volcanic ash, droughts, floods and jet stream patterns. As we showed above - technology and climate management are now inextricably linked and security for such systems is critical.
• Satellite TV and radio - On-demand entertainment content depends on satellites c22,000 miles above the Earth.
• Financial transactions - Taking cash out of the wall, making payments through POS systems, credit authorisations and even the electrical grid itself all rely heavily on the extraordinary accuracy of GPS' orbiting clock as a timing signal. Damage to this system would present major challenges to commerce globally.
• Military - As has been shown in Ukraine, the comparative democratisation of access to live satellite images and phone networks versus even 5 years ago has facilitated live and decentralised battlefield management and communication. This has been particularly valuable as ground-based infrastructure has been damaged.

From individual to corporate to military risk management, space investment is fast becoming a key area of regional security management and policy bifurcation.

Similarly, Scott went on to state that cyber security in a tense geopolitical environment is a key theme playing out in the mid-term. 

The defence security theme really resonates as it combines both geopolitical tensions and technology, both of which are overwhelming themes at the moment. The pursuit of 'security' has the greatest impact on industrials and technology, with multiple companies benefitting or facing challenges. At the sector level, it’s suggested that de-risking will affect global technology and industrial companies' fundamentals first and most significantly. Cyberthreats evolve in lockstep with new and advancing technology. As such, cybersecurity sits at the intersection of a myriad of disruptive technology themes. 

The cyberattack landscape shows the need for cybersecurity solution geared towards historically less common threats such as encrypted threats and ransomware. Corporate decision-makers rank cybersecurity as top spending priority¹⁴. More so, the Biden administrative fiscal year (FY) 2024 budget request includes US$74 billion of IT spending for Federal civilian agencies and US$12.7 billion for cybersecurity spending¹⁵. More so, the Infrastructure Investment and Jobs Actsallocated $1.9 billion to cybersecurity¹⁶. Digital defences assume critical role in geo-political discourse and in the past military spending primarily revolved around acquiring conventional hardware and ensuring supply of ammunition. Now, the landscape has evolved significantly, and budgets reflect this shift towards digitisation.

Cybersecurity and AI are poised to emerge as the beneficiaries of growing defence tech spend. Innovations in technology are reshaping modern warfare, introducing new capabilities and altering traditional strategies. Artificial intelligence (AI), robotics, and cybersecurity are playing pivotal roles in revolutionising the nature of conflict. The US Government cybersecurity investments are growing significantly year on year¹⁷.

Macroeconomic factors may spark a surge in cyber-attacks. With Russian cyberattacks a persistent threat amid Russia-Ukraine tensions, the Biden Administration emphasised the need for all sectors to join the government in making cybersecurity a nationwide effort. Prolific cybercrime creates opportunity as there is an increasing reliance on digital ecosystems which has left individuals, businesses, and governments vulnerable to the exponential rise of cyber threats. Finally, an expanding investment opportunity is appearing as current cybersecurity initiatives only service around 10% of the US$2 trillion total addressable market¹⁸. Significant exposure to global pure-play companies which have at least 50% revenue derivation from cybersecurity activities will likely appear a s industry-leading companies. 

A longer-term theme of genomics may play at well as it exists at the intersection of longevity and tech diffusion which we refer to as ‘longshots’. Companies with pure-play exposure to this emerging longshot technology include Cooper Companies, Sera Prognostics and Progyny which provides end-to-end services from IVF to surrogacy and adoption¹⁹. 

The problem: In the US, according to the UN, the proportion of women having babies between 35-39 has tripled since 1975. The proportion of children born to 20-24 year olds has more than halved. Partly as a consequence, around 1 in 7 couples have difficulty conceiving. The chance of pregnancy based on individual embryos varies from 13.8% to 66.3%. Assisted Reproductive Technology success rates are approximately 30%, with a trend of increasing female age correlating with considerably worse results. Most western nations now have birth rates that fall below the replacement rate, requiring immigration to provide a counterbalance for growth. We question whether even marginal improvements in the success rate of IVF and other reproductive techniques can provide an offsetting positive kicker to demographic trends. If those couples who wanted to have children but struggled to conceive could have a cheaper and statistically significant improvement in their odds by using new Longshot technologies, what could this mean for future demographic trends?

The Longshot: The leading meta-analysis of studies to-date comparing AI vision models' success in embryo selection vs embryologists was published in 2023. AI models had a median accuracy of 77.8% (range 68–90%) in predicting clinical pregnancy through the use of patient clinical treatment information compared to 64% (range 58–76%) when performed by embryologists. When both images/time-lapse and clinical information inputs were combined, the median accuracy by the AI models was higher at 81.5% (range 67–98%), while clinical embryologists had a median accuracy of 51% (range 43–59%). AI-driven approach provides a reproducible way to assess embryo quality and uncovers new, potentially personalised strategies to select embryos. 

Deep, rapid, and sustained emissions cuts can limit warming, but more investment is needed across all energy transition technologies, and it’s estimated that US$150 trillion from 2023–2050 will need to be spent to limit warming to 1.5°c, or about US$5 trillion annually²⁰. It’s also estimated that cleantech investment is projected to reach $1.7 trillion in 2023²¹and will need to accelerate to stay on track. 

The growth of data centres, both in terms of numbers and computing power, represents a major challenge as well as a potential opportunity for global energy markets. The electricity demand from data centres in the US could grow by as much as 3x their current requirements in a trend that is being mirrored around the world.

Nuclear power is looking like an attractive option to power this energy demand, as nuclear power is a low carbon emissions energy option and is also the biggest source of uranium demand globally. Nuclear power emits far less carbon dioxide than traditional fossil fuels, with emissions of just 12 grams of CO2 per kW/h – the same as offshore wind energy²². Nuclear is a highly dependable source of energy as it operates at full capacity 90% of the time²³. From a cost perspective, the average levelised cost of battery storage is 60% more expensive than nuclear, particularly notable given that nuclear plants achieve almost 3 times greater reliability than wind and solar plants²⁴.

At COP28, the United Nations’ annual climate change conference, a nuclear power pavilion showcased nuclear science and technology solutions for climate change. Many countries pledged to triple their nuclear energy capacity by 2050, a significant turnaround from its previous marginalisation²⁵. Canada, France, and Finland are pioneering green debt to support nuclear power generation. Global nuclear energy demand has remained high while China approved four more nuclear reactors in December 2023, bringing the year's total to 10. This accelerates China's planned 7-fold nuclear capacity rise by 2060²⁶. Finally, uranium and nuclear power received regulatory support. After nearly 50 years, the US allowed a new nuclear reactor, indicating regulatory flexibility²⁷. The case for uranium today is perhaps the strongest it’s been in a decade driven by increasing global demand and nuclear power capacity.