BlackRock's Jay Jacobs: We're seeing a lot of resilience

Key Concepts

• Artificial Intelligence (AI): A dominant investment theme, experiencing rapid growth in computing power usage (measured in token usage).
• Thematic ETFs: Exchange Traded Funds focused on specific investment themes like AI, nuclear energy, or semiconductors.
• Income Generation: Increasingly important for investors, particularly with potential Fed rate cuts. Strategies include covered call writing.
• Diversification: Expanding beyond traditional stocks and bonds into assets like gold, Bitcoin, and alternatives.
• Covered Call Options: A strategy where call options are written against owned equities to generate income, mitigating potential downside risk.
• Mega-Cap Tech (Magnificent Seven): Large technology companies heavily involved in AI development.
• Semiconductor Value Chain: The broader ecosystem of companies involved in chip production, including smaller semiconductor and memory stocks.
• Precious Metals (Gold & Silver): Assets used for diversification and as a hedge against inflation and geopolitical instability, with silver also having strong industrial applications.

Market Resilience and Earnings Season

The market is demonstrating resilience despite some volatility, particularly with the Dow. Strong earnings reports are contributing to positive sentiment, with investors remaining bullish on equities and commodities. The upcoming earnings reports from major tech companies – Apple, Meta, Tesla, and Microsoft – are expected to significantly influence the market narrative, potentially shifting focus from the discussions at the World Economic Forum in Davos. Microsoft’s performance is already notable, showing a jump in value.

The Rise of Artificial Intelligence

Artificial Intelligence (AI) was a central theme at the World Economic Forum in Davos and is considered a potentially defining theme of the decade, if not the century. Last year saw a nearly 20x increase in token usage, indicating substantial growth in computing power dedicated to AI. BlackRock maintains strong conviction in the continued rapid trajectory of this theme. However, there's a growing recognition among advisors that diversification within the AI theme is crucial. A recent BlackRock survey revealed that a majority of advisors are seeking exposure to different parts of the AI value chain beyond just the mega-cap tech names. This includes smaller semiconductor stocks (CPU and memory) and companies possessing proprietary data.

Evolving ETF Strategies: Beyond "Skimmed Cream"

The discussion highlighted a shift in ETF investment strategies. Investors are moving beyond simply purchasing baskets of the largest companies within a thematic area. BlackRock identifies three key investment "buckets": growth (like AI and supporting infrastructure), income generation (especially important with potential rate cuts), and diversification into assets with low correlations to traditional markets.

BlackRock ETF Offerings: BALI & BAI

BlackRock offers specific ETFs designed to address these evolving needs:

• BALI (B A L I): An income-oriented ETF that employs a covered call strategy. It buys US equities and writes call options on them to generate additional income, mitigating fluctuations. This replicates a strategy many investors attempt individually.
• BAI: The largest AI ETF, actively managed and focused on a more precise AI theme. While it includes mega-cap tech exposure, it also invests in smaller, less-recognized companies within the AI value chain.

A potential overlap in Nvidia exposure was acknowledged, as both funds hold the stock. However, the emphasis on diversification within the AI theme, as indicated by advisor surveys, suggests a broader approach than solely relying on a single company.

Precious Metals: Gold and Silver Surge

The conversation addressed the significant surge in precious metals prices. Gold has surpassed $2,000 a troy ounce, and silver has broken $100 for the first time ever. Silver benefits from both a precious metals narrative (diversification, inflation hedge, geopolitical stability) and a strong industrial story driven by growing manufacturing and electricity demand. Its use in tech manufacturing adds to its appeal.

Logical Connections

The discussion flowed logically from a broad market overview to a deep dive into specific investment themes and strategies. The earnings season was presented as a catalyst for potential market shifts, leading into the dominant theme of AI. The need for diversification within AI and beyond traditional asset classes was then introduced, culminating in a discussion of BlackRock’s ETF offerings designed to address these evolving investor needs. The final segment on precious metals provided a broader perspective on alternative investment opportunities.

Data & Statistics

• Token Usage Growth: AI computing power usage (measured in token usage) increased almost 20x last year.
• Advisor Survey: A majority of financial advisors surveyed by BlackRock are looking to diversify within the AI theme in 2024.
• Precious Metals Prices: Gold surpassed $2,000/troy ounce; Silver exceeded $100/troy ounce.

Notable Quotes

• “AI is growing tremendously fast we have a lot of conviction that this theme is going to continue to grow on a fast trajectory.” – Jay Jacobs, BlackRock US head of equity ETFs.
• “People still have a lot of conviction for the AI theme, but they they want to own some other parts of the value chain that could see some strong returns this year.” – Jay Jacobs, BlackRock US head of equity ETFs.

Synthesis/Conclusion

The key takeaway is that investors are becoming more sophisticated and demanding more nuanced investment strategies. Simply investing in the largest companies within a thematic area is no longer sufficient. Diversification – both within themes like AI and across asset classes – is paramount. Income generation is also a growing priority, particularly in a potentially changing interest rate environment. BlackRock’s ETF offerings, like BALI and BAI, are designed to address these evolving needs by providing access to sophisticated strategies and broader exposure within key investment themes. The surge in precious metals prices underscores the importance of considering alternative assets for portfolio diversification and risk management.