The FTSE 100 may be jam packed with ‘old’ style industries, but I don’t think this is the time for investors to abandon the index in favour of the more tech-heavy S&P 500 and Nasdaq.
AI arms race
Recently, the combined market cap of the Magnificent 7 stocks surpassed $20trn, and the top 10 stocks now account for 40% of the entire S&P 500. But I am becoming increasingly convinced that investors are wagering their chips on the wrong part of the board.
The advent of AI has sparked a technological arms race that bears no resemblance to any previous technological breakthrough. This includes the internet revolution.
The normal trajectory of a new innovation is that adoption starts slow and the eventual winners emerge over an extended period of time.
Today, however, corporations and even governments are in what can only be described as an AI arms race, in a way that has shades of the space race between the US and the Soviet Union.
Capital expenditure
Governments are weighed down with extraordinary levels of debt, so the prospecting for gold is being undertaken by the cash-rich AI hyperscalers, most noticeably Microsoft, Meta, and Alphabet.
However, the hundreds of billions of dollars that the industry is collectively spending each year is slowly weakening balance sheets.
Today, most of that upfront capital investment is going into building vast data centres. And this is where we arrive at the other side of the capital equation: that of raw materials. The perennial question, though, is do we have enough supply?
Copper
For me, the mining industry is set to be one of the major beneficiaries of this AI arms race. We are already seeing early signs that we are on the cusp of a renaissance in what I have long described as a forgotten industry.
China continues to accumulate metals with no thought about cost and the US administration recently passed an executive order re-classifying pretty much every metal out there, including copper, as a critical metal.
The mining industry is now responding. The proposed mega-merger between Anglo American (LSE: AAL) and Teck Resources will create a top-five copper producer.
The combined company will own or jointly own six huge copper mines, with an annual output of 1.35m tonnes. Peer Glencore (LSE: GLEN) is also ramping up copper production. By the end of the decade it is expecting to produce 1m tonnes a year, with a clear guide path to double output from there.
Supply deficit
Despite these investments, I remain convinced that a copper deficit is coming. The industry is just coming out of a decade-long bear market, one which has seen it starved of global capital.
Copper prices can be extremely volatile. This was all-too evident in April when tariffs were announced. Wild price swings can, ultimately, put pressure on mining margins and profitability. That remains one of the big risks investing in Anglo American and Glencore.
But, I still think investors are looking in the wrong place when it comes to the AI revolution. The tech companies are spending like drunken sailors. But I think it will be the mining industry that ultimately benefit from such a binge. That is why I recently bought shares in both mining giants.
