AI: the fourth industrial revolution?

Key points

• The conflict between observed inflation and soft lead indicators for economic activity continues to influence interest rates and economic forecasts. While some central banks may pause from raising rates, the overall balance of risks tilts towards tighter financial conditions. Investments with robust fundamentals and manageable debt levels are preferred in this environment.
• It was a weak month for Australasian markets, with the S&P/NZX 50 Gross index (with imputation credits) declining -1.7% and the S&P/ASX 200 Index declining -2.5% in AUD terms (and -1.6% in NZD terms). The New Zealand bond market was similarly weak, the Bloomberg NZ Bond Composite 0+ Yr Index declined -0.5%.
• The MSCI All Country World Index (ACWI) returned 2.0% in New Zealand dollar terms, and -0.2% in New Zealand dollar-hedged terms. There continued to be large dispersion within the index, with the information technology sector advancing 8.0% whilst the energy sector dropped -9.6%.
• The technology sector was buoyed by artificial intelligence (AI)-frenzy during the month. Shares in chip-maker NVIDIA surged over 30% in May after revenue forecasts came in over 50% higher than analyst estimates. This was due to high demand for graphics processing units (GPUs) for use in generative AI technology such as ChatGPT (see ‘What to watch’ for more on AI).

Global share markets experienced a decline as weakening economic data impacted earnings expectations. The increase in government bond yields, driven by US Budget negotiations and uncertainty surrounding central bank interest rate moves, also influenced valuation multiples. Economic indicators continued to signal potential downside risks to economic growth forecasts. China's economic performance fell short of expectations due to COVID-19 waves affecting activity and a soft residential housing market undermined consumer confidence.

The information technology sector globally outperformed other sectors, benefiting from the opportunities presented by AI. Conversely, sectors with exposure to economic cycles underperformed because of slower economic activity. In New Zealand, the information technology, materials (attributable to Fletcher Building), and utilities sectors performed well. On the other hand, the healthcare sector (impacted by Fisher & Paykel Healthcare and Pacific Edge), consumer discretionary sector and communications sector (primarily Chorus) underperformed. In Australia, the top-performing sectors were information technology, utilities, and energy, while consumer discretionary, consumer staples and materials (including BHP) were the worst performers.