Hoffmann-Burchardi joined UBS in 2023 after 25 years at Tudor Investments, the place she was an early investor in digital disruption and the likes of Nvidia. Now, she helps information institutional traders and ultrahigh-net-worth purchasers as chief funding officer of worldwide equities for UBS World Wealth Administration, which oversees practically $4.2 trillion in belongings. On the finish of this month, she’s going to add the title of CIO of Americas.
We spoke with Hoffmann-Burchardi in late Could and once more through e-mail on June 13 to be taught why she’s assured in regards to the U.S. market and financial system. We additionally delved into spending associated to synthetic intelligence, the place the primary $10 trillion firm would possibly come from, and why the U.S. fiscal deficit really might supply U.S. shares some assist.
Barron’s: What’s your framework for eager about the market and shares? You appear much less involved than your friends in regards to the conventional classes for shares, like progress and worth.
Hoffmann-Burchardi: Now we have three views necessary to formulate our views: an understanding of the macro scenario, significantly actual GDP progress and actual rates of interest; an understanding of particular corporations; and transformational alternatives.
Just one% of public corporations create 80% of the wealth in fairness markets, so understanding the large-cap gamers is crucial. Over the previous 30 years, the model components which are so predominant in investing—measurement and worth or progress—accounted for simply 5% of fairness returns. Now we have to rethink the framework of how we allocate portfolios, since over 50% of returns are company-specific. So, we ask how we will discover these corporations or components driving wealth creation: Transformational improvements are key and underappreciated by the funding group.
What are a few of the massive transformational improvements of the previous?
We checked out which corporations hit sure market cap thresholds. Common Motors was the primary $10 billion firm, after which IBM with the invention of the PC was the primary $100 billion firm. Apple turned the primary $1 trillion firm. Each time these corporations attain a brand new market cap threshold, it’s as a result of they have been in a vortex of some innovation transformation. Now, we expect AI, electrification, and longevity are the alternatives, and the primary $10 trillion firm will seemingly come up inside these improvements.
Extra instantly, what does the battle between Israel and Iran imply for the market?
Our base case is that this battle doesn’t escalate, given U.S. and worldwide pressures. However we’re looking ahead to indicators, particularly, that Iran makes an attempt to shut the Strait of Hormuz, the world’s most crucial oil chokepoint, which might danger world escalation. We supply a gold allocation within the portfolio to function a disaster hedge in addition to a hedge towards inflation and greenback draw back.
What’s your normal expectation for the market?
After the current rally within the S&P 500 index, we downgraded the U.S. to impartial however nonetheless see upside to our 12-month value goal of 6400. Given the tough fiscal scenario within the U.S., with debt at greater than 120% of gross home product, the coverage path is more likely to be alongside a fiscal tightrope, imposing guardrails for an financial coverage that must be growth-oriented whereas fiscally prudent.
Related historic episodes of excessive debt ranges, such because the U.S. and United Kingdom after World Warfare II and Canada within the Nineteen Nineties, recommend that financial progress is likely one of the key components in decreasing deficits. That makes us imagine from a tariff and an economic-policy perspective there can’t be a danger to the financial system slowing. On the subject of commerce coverage, we try to distinguish between negotiating technique and meant consequence.
What’s your base case for commerce coverage?We predict the 25% efficient tariffs introduced on [April 2] have been a place to begin to negotiations, however will finally settle nearer to fifteen% by 12 months finish. The current court docket rulings give negotiating companions extra leverage. The longer these proceedings final, the extra seemingly it’s that tariffs will develop into extra reasonable than feared. Equally necessary is how selective tariffs are going to be. For imported items that can’t simply be substituted with U.S. items, similar to superior AI chips or lively pharmaceutical components, excessive tariffs are economically extra damaging.
What are the prospects for a U.S. recession?
There may very well be a little bit of financial weak spot within the subsequent few months, as corporations are reluctant to speculate, given the tariff uncertainty. Coverage uncertainty is at ranges much like Covid 19, additionally mirrored within the excessive variety of mentions of “uncertainty” in earnings calls.Up to now, earnings outcomes have been sturdy within the first quarter, whereas second-quarter steerage is a little more combined, with some corporations pulling or issuing scenario-based steerage. Now we have not but seen an affect on employment, seemingly as a result of corporations have realized from Covid-19 that layoffs aren’t simply reversible. Regardless of the market rebound, there stays investor skepticism in regards to the U.S. commerce and financial place.
What’s the U.S.’s actual edge at this level?
If we take a look at transformational innovation alternatives, most corporations poised to pursue them are based mostly within the U.S. There may very well be hiccups, however we’re not as pessimistic as lots of people are. I take into consideration the place progress might come from. AI is a type of alternatives that can result in unprecedented productiveness progress over the following few years, and the U.S. is in pole place.
The progress made by China’s DeepSeek raised issues that AI would require much less spending on chips, {hardware}, and energy era. How do you see it?
The market interpreted DeepSeek as AI changing into a lot extra environment friendly that we don’t want {hardware} and chips as a result of it’s solely utilizing a fraction of the compute. Our view is completely different: If a useful resource turns into extra environment friendly, you’ll use extra of it.Within the semiconductor market, the price of a transistor has dropped by 99.99% over the previous 50 years, however the whole market worth (value multiplied by quantity bought) has elevated greater than 100 instances. That’s a phenomenon known as the Jevons paradox, which states that when know-how makes it extra environment friendly or cheaper to make use of a useful resource, folks use extra of it, rising relatively than lowering the whole measurement of the market. The extra environment friendly AI will get, the extra broadly it may be adopted. We’re early on this.
What else is underappreciated about AI?
It’s the primary know-how in human historical past that’s self-improving. That’s why we’re seeing such unprecedented change and why it’s extra unpredictable than improvements which are extra linear.
Proper now, our AI utilization relies on question-and-answer AI interactions, however as we transition towards bigger-enterprise use instances—together with prolonged doc creation for regulatory filings and stories after which agentic AI, the place brokers will autonomously full more-complex duties—AI would require extra compute. In our estimates, compute demand for generative AI workloads may very well be 5 instances greater than the present compute provide, pushed primarily by the reasoning depth of agentic AI.
That makes us imagine that the “picks and shovel” layer of AI—cloud corporations and AI chips—will nonetheless be a key a part of the funding thesis. In some unspecified time in the future, it is going to transfer towards the purposes layer, however quite a lot of which will occur in personal markets. Firms that personal the entire vertical stack for AI—chips, intelligence, and software layers, similar to a number of of the big-tech corporations and hyperscalers within the U.S.—supply the very best danger/reward alternative.
What are the very best funding alternatives in electrification?
We see an imbalance within the demand and provide for electrical energy over the following decade. On the demand aspect, it’s pushed by electrification of the bodily financial system from transportation to buildings. AI compute demand performs a job, as nicely: We see 8% of the electrical energy demand improve between now and 2030 coming from AI information facilities. On the provision aspect, we face an outdated electrical grid that’s at or past its meant lifespan. Within the U.S., greater than 70% of the transmission traces are over 25 years outdated, many approaching the tip of their 50-to-80-year service life, in line with the U.S. Division of Vitality.
What’s one other massive funding theme?
Longevity is a slower-moving theme. We are going to see extra 65-year-olds and older by 2034 versus these 18-years-old or youthful. Drug discovery is being helped by massive language mannequin AI. AlphaFold [an AI program] makes use of LLM to foretell the 3-D construction of proteins—a giant breakthrough for drug discovery. Some corporations are targeted on utilizing AI for sure ailments like Alzheimer’s. We’re investing in that theme by pharma and medical gadgets. It’s nonetheless early on its affect on shifting client traits and patterns, however it is going to have quite a lot of implications.
How do these themes join with the geopolitical debates weighing on markets?
Understanding these transformational improvements is essential to the geopolitical stakes. Why do now we have export restrictions on AI chips [to China]? As a result of, finally, AI is seen as the important thing geopolitical software, and supremacy in AI means quite a bit. The identical administration is taking a look at [tariffs and restrictions] associated to semiconductors and prescribed drugs.
What now we have seen from Trump 1.0 and more moderen remarks is that his method is a diplomatic one. A extra de-escalatory diplomatic path is a optimistic geopolitically. But when something occurs in Taiwan—although the chance is sparse—the potential affect is huge. The one technique to shield a portfolio from a lot of these tail dangers is with diversifiers similar to gold. Gold has run quite a bit, however we nonetheless prefer it as a buffer or diversifier. Larger-quality corporations inside the vortex of those transformational corporations can also be a spot the place over the long run now we have excessive conviction.
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