Trends We're Tracking: Generative AI Boom, Bond Issuance, and Cash is Trash No More

Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.

Amidst the big tech gloom, generative AI boom

In early January, we wrote about ChatGPT and its potential applications. The generative AI space continues to be in large focus for the tech sector, as Microsoft confirmed that they are extending the partnership with OpenAI, the maker of ChatGPT tool. This multi-billion-dollar deal, rumored to be around $10 billion, notably comes just after Microsoft announced its plans to lay off 10,000 employees globally. While the Microsoft’s partnership and investments with OpenAI started in 2019, the scale of fresh investments coupled with its focus on building out Azure’s AI infrastructure, is expected to up the competition among big tech firms in the generative AI space.

Competitors like Alphabet, Amazon, and Meta have been investing heavily in AI-related research but were reluctant to roll out such products as worries about safety, accuracy, and challenges around handling misinformation were holding them back. However, Microsoft’s high conviction bet in this space might embolden others to follow. Speculation is rife that Chinese tech giant Baidu is on the cusp of announcing a product which integrates a ChatGPT style application into its search engine.

Whether it comes to its ability to crack a competitive exam or creating AI art, initial reaction shows that users are impressed with AI tools like ChatGPT and DALL-E. If this indeed proves to be a trend and not a fad, as generative language models evolve, sectors they can disrupt and industries and companies they can create will be something to watch out for.

Global bond issuers take advantage of lower yields, volatility

Following one of the worst years for the global bond market on record, volatility and yields plummeted in January 2023. These easing financial conditions cleared the way for governments and firms to tap debt markets for their financing needs, which they did in a big way. In the first half of January alone, global bond sales topped $580 billion. By the end of the month, bond sales in the U.S. had crested $400 billion, while European issuers brought a record €280 billion to market as economic conditions surprised to the upside and borrowing costs eased.

Cash is trash no more

Cash has long been ridiculed as “trash” during the decade-long, super-easing cycle that ended abruptly in 2022 and for good reasons. With yields near 0% for much of the era, and with plenty of more attractive investment opportunities, cash has been a losing wager. However, with the Federal Reserve raising the Fed Funds Rate by a whopping 450 basis points since the beginning of 2022 and likely to keep going through 2023, cash has turned attractive in several aspects, shedding its “trash” label. First, cash or money market funds now yield more than 4% and its yield is likely to keep climbing. For a widely considered low-risk investment, 4-5% return is attractive on an absolute basis. Second, on a relative basis, with the yield curve severely inverted (2-year Treasury yielding 72 bps more than 10-year Treasury), money market funds are yielding substantially more than most bonds with no duration risks and essentially no credit risks. Lastly, we remain in a quite volatile market environment and getting paid 4% or higher to sit on the sidelines with low risk and no lock-up commitment has moved cash from beyond the trash bin.

Fund managers flee China for Europe

Even though China has relaxed it’s strict anti-COVID policies, several U.S. asset management firms that had previously launched their footprint in the country have recently pivoted to Europe. By focusing on organic growth within already establish European countries, top asset managers seek to insulate themselves from the disruption brought on by the pandemic. Increased geopolitical tensions have exacerbated the situation, as the U.S. government has increased scrutiny on Chinese firms. Europe’s deeper focus on sustainable investing and their strong regulatory regime make it an attractive market for asset management firms.

Sources:
https://hbr.org/2022/12/chatgpt-and-how-ai-disrupts-industries
https://www.forbes.com/sites/qai/2023/01/27/microsoft-confirms-its-10-billion-investment-into-chatgpt-changing-how-microsoft-competes-with-google-apple-and-other-tech-giants/?
https://blogs.microsoft.com/blog/2023/01/23/microsoftandopenaiextendpartnership/
https://www.bloomberg.com/news/articles/2023-01-30/chinese-search-giant-baidu-to-launch-chatgpt-style-bot-in-march?
https://www.bloomberg.com/news/articles/2023-01-19/global-bond-sales-surge-to-record-start-of-year-at-586-billion
https://www.ft.com/content/437a0434-7527-471d-bb9d-b5ac7d308886
https://www.reuters.com/markets/rates-bonds/european-debt-sales-break-january-record-tricky-year-2023-02-01/ 
https://www.wsj.com/articles/jittery-investors-turn-to-cash-in-hunt-for-yield-11674615515 
https://www.ft.com/content/ddb4c8c8-f6d9-4b35-b349-1ad8ab4a172c