Thematic Commentary – 31 May

Innovation

Activity within the five innovation platforms contributed to market movement:

• Artificial Intelligence: AI remained the key focus of market participants with all eyes on semiconductor companies and if insatiable demand would sustain.
• Robotics: Continued collaboration between AI and Robotics oriented companies highlighted their convergence. Autonomous systems continue to be an area of focus on both sides.
• Energy Storage: Investors eyed weak consumer sentiment coupled with the introduction of EV tariffs. Investors digested Tesla’s comments on how it will navigate the path towards autonomous vehicle production.
• Blockchain Technology: Bitcoin rallied 11% which drove positive returns for digital asset companies. Investors reweighed the possibility of Ethereum Spot ETF approval by the SEC
• Genomics: During May, market movement in the multiomic space was mainly driven by several landmark events such as Food and Drug Administration approval, advancement in drug development and positive study results.

AI and Robotics

AI and Robotics saw significant developments in May. Notable contributions came from key players such as NVIDIA, which continues to lead in AI training and inferencing hardware, supporting the development of AI-powered autonomous machines. NVIDIA’s Isaac robotics platform has been widely adopted by industry leaders like BYD and Teradyne, enabling the development of advanced autonomous mobile robots and collaborative robots. These integrations are expected to enhance worker safety, reduce production costs, and improve production intelligence across various industries.  Technological trends emphasize the optimization of AI models for more efficient deployment. Techniques such as Low Rank Adaptation and quantization are becoming more prevalent, and small language models are becoming more performant, making sophisticated AI capabilities more accessible to smaller companies and startups. These advancements are enabling more powerful virtual agents and expanding the use cases for AI beyond traditional applications. The competitive landscape of AI in robotics continues to evolve, with increased fragmentation and opportunities for innovation, as companies advance their research and development efforts in the United States and globally.

Genomic Revolution

During May, market movement in the multiomic space was mainly driven by several landmark events such as Food and Drug Administration (“FDA”) approval, advancement in drug development and positive study results. For instance, the FDA approved Moderna’s RSV vaccine mRESVIA, marking the first mRNA vaccine not specifically for COVID-19 approved in the US. Prime Medicine presented clinical data demonstrating the ability of PM359, an ex vivo prime editing-based therapeutics, to correct disease-causing mutation in chronic granulomatous disease (“CGD”) patient blood stem cells, leading to restored immune function in vivo with no off-target edits detected. PM359 will also be the first prime editing-based therapeutics entering clinical trials. Additionally, the FDA issued platform technology designation draft guidance in May, allowing pharmaceutical or biotech companies to reuse data for previously approved drugs sharing the same technology approach for additional drugs in development, which could lead to further time and cost savings in drug development processes. Given that the vast majority of therapeutics-focused companies (e.g. CRISPR Therapeutics, Intellia Therapeutics and Arcturus Therapeutics) in ARKG holding have their own platform technology, we believe that those companies could potentially benefit from this guidance in the long run.

Circular Economy Enablers

In May, The European Critical Raw Materials Act (“CRMA”) came into law. This legislation aims to enhance the EU’s capabilities in sourcing, processing, and recycling critical raw materials, known as “CRMs.”  These are essential to achieve climate and sustainability objectives. For example, materials such as lithium, cobalt and nickel, are used to produce batteries and crucial in the development of renewable energy technologies. The CRMA has set ambitious targets for 2030 and notably mandates no more than 65% of any strategic raw material to be sourced from a single country. Given recent geopolitical developments ushering in a new era of energy security, this is a move to limit supply chain risk in the EU and reduce its dependence on other economies. The CRMA also integrates the United Nations Framework Classification for Resources promoting standardisation, transparency, and efficiency in the CRM sector.

These developments are expected to help promote circular economy practices by ensuring efficient and sustainable use of CRMs, advancing recovery from waste, and developing crucial secondary markets. Of course, the degree of success will depend on the level of international cooperation, which should be helped by the establishment of a Critical Raw Materials Club to promote collaboration with like-minded countries.

Environmental Impact

The highly anticipated International Energy Agency’s (“IEA”) World Energy Investment 2024 report revealed significant progress in the energy transition with the world now investing almost twice as much in clean energy than in fossil fuels. In fact, global energy investment is set to exceed $USD 3 trillion in 2024, with $2 trillion allocated to clean energy technologies and green infrastructure. The report highlights a significant increase in investments in renewable power, grids, and storage, driven by new policies and funding, particularly in the United States, China, and Europe. As a result, the IEA expects renewables to account for more than one-third of global electricity generation by the end of the year, but this doesn’t go far enough. There remains a long road ahead in terms of investment needed to meet net zero emissions by 2050.  Bloomberg NEF recently forecast in its Global Energy Outlook 2024 (see chart below) that global emissions may have peaked last year however this has been led mostly by the structural decline of coal power. The next leap forward for decarbonisation therefore will require a doubling of current annual spending to triple renewable capacity by 2030 although recent progress has been challenging. A major hurdle has been the high cost of capital and whilst a declining rate landscape should help ease financial conditions, it remains imperative that policymakers foster an environment where financial institutions are able to successfully mobilise capital to support clean energy investment.

Global Sustainable Infrastructure

In May 2024, the Department of Energy’s Innovative Grid Deployment report emphasized the urgent need to upgrade the U.S. energy grid to support a sustainable economy and meet rising energy demands. With over 30% of transmission lines needing replacement within a decade and 60% of distribution lines nearing the end of their life, investing in advanced technologies like high-voltage direct current lines and dynamic line rating is crucial. These upgrades could support an additional 20-100 GW of peak demand, saving $5-35 billion in infrastructure costs. Globally, investing in grid infrastructure is vital for economic growth and decarbonization, ensuring a reliable and resilient energy supply for the future. The Federal Energy Regulatory Commission’s new rule requiring 20-year grid investment plans highlights the importance of long-term planning. Companies are already stepping up, with National Grid and Hitachi Energy significantly increasing their investments. Advanced technologies such as dynamic line rating can be deployed in 1-3 years, much faster than the 7-10 years required for new infrastructure. Aligning incentives and integrating these technologies can drive immediate and long-term benefits, enhancing grid efficiency, reliability, and resilience. Additionally, the growing demand from AI and data centers necessitates a bigger, more resilient grid. Investing in and upgrading existing infrastructure is as crucial as building new infrastructure to meet these demands. For more information, visit this link.

Sustainable Future of Food

The Farm Bill is a comprehensive piece of legislation that guides agricultural policy in the United States. It encompasses a range of issues from food assistance programs and crop insurance to conservation efforts and agricultural research. Since its enactment in 1933, the bill has been renewed roughly every five years, yet the 2018 Farm Bill remains long overdue! Congress is in the process of reauthorising the bill, however there is debate over how to best allocate funds earmarked for “Climate Smart Agriculture” which involves the implementation of technology to improve crop yields and minimise resource inputs. Democrats support the existing $USD 20 billion in Inflation Reduction Act funding for United States Department of Agriculture conservation programs promoting practices like cover cropping and regenerative farming. However, Republicans are pushing to reallocate these funds into the Farm Bill, broadening its eligibility to include traditional conservation activities. Whichever path is eventually taken, there must be continued focus on allocating funds towards innovation, research, and development in agriculture. This will foster new technologies and industrial policies capable of reducing emissions whilst boosting crop yields. The current extension of the 2018 Farm Bill is set to expire on September 30, 2024, so time is running out to resolve these differences and secure the necessary funding for climate-smart agriculture initiatives.

Cybersecurity and Data Privacy

In 2024, the cybersecurity sector has shown significant promise, driven by advancements in AI and an increasing need for robust digital protection. Notable performers include CrowdStrike and Zscaler, both reporting revenue growth exceeding 30%, with CrowdStrike’s revenue at ~$3.3 billion and Zscaler’s at ~$2 billion in the last twelve months. Broad-based strength is evident as even companies like Palo Alto Networks, whose next-gen solutions grew 47% on a base of $3.8 billion, and Cloudflare, which reported 31% growth, delivered strong results despite initial investor disappointment. Challenges remain for some, such as SentinelOne, which delivered industry-leading 40% growth but faces scrutiny for profitable growth, and Okta, which reported better-than-expected earnings but struggles with long-term growth and margin expectations. The sector’s potential is underscored by the rise in ransomware attacks, affecting over 10% of organizations, and the pullback of many cybersecurity stocks by 20-30%, presenting buying opportunities given their strong earnings and growth prospects. Investing in and upgrading existing infrastructure is as crucial as building new infrastructure to meet these demands.

Digital Payments Economy

In May, card payment network giant Visa introduced several innovative new digital products at its Visa Payments Forum in San Francisco set to “revolutionise the card.” Enter Visa Flexible Credential, this allows users to switch between debit, credit, rewards points, and buy-now-pay-later (“BNPL”) options before completing transactions. This is currently active in Asia and will be brought to the U.S. through a partnership with BNPL fintech firm Affirm. We also saw the introduction of Visa’s Tap to Everything service which enables NFC-enabled devices to accept payments, transfer funds, and verify identities. Visa also expanded its Pay by Bank service from Europe to the US, which aims to streamline account-to-account payments. Of course, no fintech gathering would be complete without mention of artificial intelligence developments. Visa discussed Visa Protect, a component of its value-added services that leverages A.I. to help mitigate fraud. It also introduced A.I. powered data tokens, allowing consumers to control and revoke access to their data shared with merchants. These innovations represent “the next generation of truly digital-native card experiences” offering a more personalised and secure digital payments future.