Capturing Long-Term Alpha Opportunities in AI and China’s Consumer Economy

Aziz Hamzaogullari:
... the direct beneficiaries, so meaning people actually generating cashflow by selling into these companies, will be very few select companies. And that's what's interesting because investors usually get very excited about a space and they think there are thousands of winners. It's usually very few winners when you look at history.

This is a structural, big disruption that will really cause a significant increase in productivity. If you look back, big disruptions, the commonality is, for example, in mid -90s, we had significant increase in productivity. When you go back and look at the testimony from Greenspan, he would keep saying in those years, "We are surprised with productivity increases." Well, that was happening because of technology advancement.

And similarly, we think that AI is one of the biggest changes or disruptions that we have seen because it impacts almost every industry, from healthcare in how you innovate drugs to a manufacturing company, how you build a factory first virtually and optimizing it, then doing in real life with real inputs. Or if you're a software company, how you write software you changes. So we believe that this is a big disruption, but what's important to realize is though it will benefit almost every company out there in terms of productivity, the direct beneficiaries, so meaning people actually generating cash flow by selling into these companies, will be very few select companies.

And that's what's interesting because investors usually get very excited about a space and they think there are thousands of winners. It's usually very few winners when you look at history. Absolutely. We believe that whenever there's a big disruption, whether it was the telecom or before that, internet-based computing, you always have a lot of excitement that is sort of right the place in that this is a big change and disruption. What people get wrong is how many winners there will be.

So if you look at, for example, dot com era, if you go back to dot com bubble, you're going to find that there were 400 companies or so that appreciated 100% or more in a very short period of time, 25 years later, but you're going to find that out of those 400 companies, 300 do not exist today, 190% of them underperform massively the indices, but those 10 or so businesses done extremely well.

So similarly with AI, I think you need to discern and find handful businesses, less than 10, definitely, not hundreds of businesses and understand which one of those will be there 20, 25 years from now, versus which one of those won't even exist two decades from now. And I think that's the art of investing and finding those high quality winners that will structurally benefit in the long term from AI.

If you look at China, it's a very big market. It's roughly one fifth of the world economy roughly there are 1,000,000,000-plus people living there and among hundreds of companies out there, there are very few select companies that we believe will benefit from a very structural shift in the long term from an infrastructure economy to a consumer economy.

What I mean by that, if you look at history of all the developed nations from UK to Japan to US, what you're going to find is for the first 100 plus years, they really build infrastructure, and then consumer spending drives the economy of those countries. So if you look at US, for example, two thirds of the economy is really tied to the consumer versus in China, it is the exact opposite, it's roughly one third, two thirds, so one third consumers and two third infrastructure, government spending and all that.

So we believe that this would be a very, very long term, not just next day, next quarter, but long term shift to a consumer based economy, and there will be many companies that will, we believe, benefit from that.