SPW MarketWatch: July 2023

Source: FactSet, 2 August 2023. Figures are monthly price returns in local currencies for July 2023.

AI in the spotlight

In July, Microsoft announced it would charge users of its Office 365 package $30 (£23) a month if they wanted to use its artificial intelligence (AI) features. Microsoft CEO, Satya Nadella, said this marked the ‘third leg’ of its services, with the first two legs comprising Word and Excel, and its cloud services (1).

Meanwhile, in a call with investors and analysts, Mark Zuckerberg, chief executive of Facebook-owner Meta, said AI was now contributing to the company’s revenues. The company also announced the launch of a commercial version of the AI service it calls ‘Llama’, a rival to the Microsoft-backed AI chatbot ChatGPT.

The software technology behind the popular ChatGPT service is not freely available, but that of Llama will be. In an article on 11 July in the Financial Times, Meta’s president of global affairs (and former UK deputy prime minister) Nick Clegg said: ‘Openness isn’t altruism: Meta believes it’s in its interest. It leads to better products, faster innovation and a flourishing market, which benefits us as it does many others.’

Funding for technology companies has fallen since the collapse of tech-focused Silicon Valley Bank in March. But continuing interest in AI is reflected in a raft of takeovers of AI companies by other tech companies. Most notably, at the end of June, US firm Databricks announced the acquisition of AI platform Mosaic ML for around $1.3 billion (2). Around the same time, New York-listed Thomson Reuters announced the $650 million acquisition of Californian legal services AI group Casetext (3).

Our outlook

At Schroders Personal Wealth (SPW), we are keeping a close eye on AI developments and their implications for investments, the markets and the wider economy. But one of our key principles is diversification, of spreading investment risk by not having all our eggs in one investment basket. We believe in the benefits of investing across a range of industry sectors, and we seek to avoid too much exposure to any particular areas of industry, including AI.

At present, we have a neutral stance on US shares in general (which have a heavy weighting to the technology sector) as we have to equities (shares) globally. In our view, the valuations of equities have become quite expensive compared with other asset types, such as corporate bonds, so we prefer to seek opportunities elsewhere.

Gilts yields at record high

The 5 July sale by the UK government of bonds (gilts) with a two-year expiry date came with the highest borrowing cost for two-year gilts in the 21st century. This reflects the current high cost to the government of paying for its debt.

The government offered purchasers of these bonds a yield (income) of 5.668 percent. This is the highest yield on any debt sold by the UK government since 2007, when the yield on a five-year gilt was slightly higher. These relatively high yields reflect the UK’s current high interest rate environment (4).

At present we have a neutral stance on UK government bonds, as we do with government bonds in general. But we have a positive stance overall on corporate bonds. We have a particular preference for European high-quality corporate bonds, which offer significantly higher yields than government bonds. But we have a neutral stance on US high-quality corporate bonds, which we believe lack the yield attraction of their European counterparts.

Sources:

(1) Financial Times, ‘Microsoft to charge $30 per month for generative AI features’, 18 July 2023.

(2) Databricks, ‘Databricks Signs Definitive Agreement to Acquire MosaicML, a Leading Generative AI Platform’, 26 June 2023.

(3) Thomson Reuters, ‘Thomson Reuters Corporation Signs Definitive Agreement to Acquire Casetext’, 26 June 2023.

(4) Financial Times, ‘UK sells £4bn of debt at highest 2-year borrowing cost this century’, 5 July 2023.