Connecting the AI Transition and Commodities with Fidelity's Joe Overdevest

July 30, 2024

3 minute read

According to FidelityConnects by Fidelity Investments

The latest quicktake from FidelityConnects delves into two compelling topics with Joe Overdevest, a seasoned portfolio manager at Fidelity Investments Canada. Overdevest takes us through the potential impacts of the AI transition on various industries and provides a some insight and a ranking of his current favorite commodities.

Companies Benefiting from the AI Transition

First, Joe Overdevest begins by highlighting the transformative nature of the AI space. When change occurs, Fidelity gets particularly excited, recognizing both the potential winners and losers. The companies that stand to gain the most are poised for higher returns on invested capital and a greater share of economic benefits.

The “Mag seven” hold a prominent position, largely due to their significant size and the trust they command from customers. Trust is essential when dealing with AI, particularly concerning data security. Additionally, substantial financial investment is necessary to thrive in this field.

Interestingly, there is a notable shift within tech companies. For years, software-driven initiatives dominated, but now hardware companies supplying networking equipment for data centres are experiencing massive growth. Companies involved in designing data centres, power distribution, and providing physical components are also seeing increased demand.

Even the need for electricians is soaring, with Canadian companies supplying skilled labor rising to meet this challenge. Physical commodities like copper are crucial for building data centres and electrifying the grid. This increasing demand could tighten supply, particularly with many copper investments tied to the Toronto Stock Exchange.

Lastly, often-overlooked sectors like utilities might also see growth. North America's energy consumption has been flat for 15 years despite rising housing and GDP figures. This efficiency trend could reverse if AI and data center demand continue to surge, potentially boosting utility companies’ growth in electricity, nuclear, natural gas, wind, and solar energy.

Ranking Commodities

Overdevest then transitions to a discussion of commodities, ranking them based on the current supply and demand landscape.

At the top of his list are:

1) copper, followed by
2) uranium,
3) oil,
4) gold,
5) agriculture, and
6) natural gas.

Copper

Copper's story is one of demand. Electrifying the grid and carbon reduction are driving factors, augmented by AI and data center needs. With steady demand in recent years, any continuing trend could accelerate copper consumption. Moreover, political challenges in major copper-producing areas complicate supply growth, pushing big producers towards mergers and acquisitions rather than new mines.

Uranium

Uranium ranks high due to its increased adoption in recent years. Once sidelined in favor of wind, solar, and hydro power, uranium is now recognized as a crucial component of a green economy. Countries like the U.S., Canada, and several European nations are catalyzing this shift, with limited supply further solidifying uranium’s value.

Oil

Oil remains a critical commodity, driven by steady demand amid limited supply growth. Government regulations and shareholder preferences for dividends and buybacks are curbing expansion in oil production. This supply constraint, combined with enduring demand, suggests tightness in the oil market could intensify.

Gold, Agriculture, and Natural Gas

Gold is somewhat less favored, and agriculture and natural gas sit near the bottom. The supply of natural gas is plentiful due to recent warm winters and burgeoning LNG production. Agriculture, particularly potash, also faces relatively loose demand, with limited buying from significant players like China.

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The views and opinions expressed in this blog are those of the participants and do not necessarily reflect those of Fidelity Investments Canada ULC or its affiliates. This content is for informational purposes only and should not be construed as investment, tax, or legal advice. Always read a fund’s prospectus, and consult a financial advisor.