We ended the second quarter with a YTD positive performance of about 29%. Just after the market closed on 30 June 2023, Apple reached a market cap of 3 trillion Dollars, the highest ever achieved by any company to date. In this light, let us take this opportunity to address a major point of controversy that has been widely debated of late i.e.: “the market rally is unsustainable because it has been led only by a few mega cap companies whose valuations are overly stretched.” While it is tempting to follow that line of argument, we would like to offer a different view.

Firstly, most of the mega cap companies such as Google, Meta, and Amazon that have outperformed the broader market had aggressively taken the bitter pill in 2022. We keenly observed that last year and did act on it. As these companies have an agile cost structure and large fixed capital investments, aggressive reductions of cost have resulted in better-than-expected earnings.

Secondly, the cycles of those companies seem to be ahead of other industries. The peak to trough cycle seems to have passed in late 2022 or early 2023. Going forward we may begin to see stabilization in revenue and when combined with the first point of cost reduction, the rally for the mega cap may sustain and we think that the market is not unreasonable to take comfort in that.

Lastly, let’s once again talk about AI as we believe AI will be a longer-term theme and will be a very powerful force of disruption. At this point in time what we are seeing is AI applied for point solution i.e.: deploying AI for a new specific application that can work independently such as ChatGPT and Google’s Alphafold. However, the greatest prize will be for the one who can deploy and capitalize on AI for systems solution i.e.: deploying AI for various interdependent applications that together create a larger system like how modern telecommunications systems and the internet came to be today. We believe in the case of AI; it will be far more powerful than anything we have seen. In our view, the market is quite shrewd in trying to pick who might be the potential winner in the AI race. Just like what we had discussed before in our previous commentaries, the ones who have the greatest potential to create systems solution based on AI, at this point, would be the mega cap companies with their first mover advantage, know-how and vast resources.

In the quarter, some notable move in the portfolio includes tactically reducing some position in AMD and Meta as a part of portfolio rebalancing and starting to build some position in the memory space i.e.: Micron as we believe that memory will be increasingly crucial in driving the performance of AI.

Just like how Apple’s iPhone revolutionized mobile phones (rather mobile computers really) and took the lion share of the market; we think the dynamic of the AI race will be similar in that: the winner may not take all, but it will take most. We believe our portfolio is well positioned to capitalize on the future.

30 Jun 2023