Norway’s $1.7T SWF Bets on US AI
World's largest SWF posts profit of $138B on Nvidia, Microsoft, and Alphabet returns
Norway's $1.7 trillion sovereign wealth fund posted profit of $138 billion on August 14 driven by strong returns in US technology due to demand for Artificial intelligence (AI) while reducing its holdings in one of Europe’s largest AI-focused companies - ASML Holding (ASML).
The largest fund in the world, managed by Norges Bank Investment Management (NBIM), increased its holdings in US AI companies like Apple (AAPL) and Microsoft (MSFT) to a total of 13.3% in the first half of 2024 from 11.2% in 2023, NBIM said in its first-half earnings report.
Total equity value in US tech increased an annual 43% to $226 billion, delivering a 27.9% growth. Major holdings in Nvidia (NVDA), Microsoft, and Alphabet (GOOGL) delivered the highest return at 38.6% after the fund increased its exposure to tech by 32% compared to the entire 2023, accounting for 18.2% of all investments from 15.5% prior.
While the fund made significant gains from US tech stocks, Europe's returns on equity investments totaled only 8.3% despite accounting for 25% of total equity investments, the lowest return among the fund’s markets, including North America, Asia and Oceania, and Emerging markets, NBIM said.
Europe lags in AI development and quantum computing, which are crucial for tech, as they grapple with a challenging economic and regulatory environment that hinders companies' revenue growth.
Europe’s AI Act
The European Union's (EU) Artificial Intelligence Act (AI Act), which came into force on August 1, may have played a role in the fund’s decision to trim ASML. Europe’s introduction of a risk-based approach to different AI applications may impose significant compliance costs on companies, with non-compliance resulting in fines as high as 35 million euros.
The General Data Protection Regulation (GDPR) provides a precedent for the potential impact of the AI Act on company revenues, as it reduced profits for European businesses targeting European consumers to an average of 8%, according to an Oxford University report on privacy regulation and firm performance.
Big tech providers such as Microsoft, Amazon, and Google, all US-based tech giants, were not affected, the report said. However, the European Commission is known for slapping Big Tech with billions of dollars in antitrust fines.
Reduced revenues for European companies could lead to lower corporate tax receipts for EU member states and increase budget deficits, potentially leading to higher sovereign debt levels as governments may need to borrow more to cover the shortfall.
"We are worried about it because it's at a level we haven't seen (before), it is continuing to increase, and there seems to be very little willingness anywhere in the world to actively try to reduce it," Nicolai Tangen, Norway’s sovereign fund’s CEO, said at a news conference.
Europe Debt Levels
Sovereign debt levels in Europe increased significantly during the pandemic to 98% of GDP, leading to higher debt-to-GDP ratios in peripheral euro-area countries more vulnerable to economic shocks, but have come down to 88.7% since.
The European economy showed signs of recovery at the start of the year and last week’s data indicated the end of Europe’s mild recession in the first quarter of 2024, suggesting some positive momentum ahead.
There is still a risk that the recession could resume due to ongoing economic challenges and geopolitical uncertainties, Europe's most significant source of risk.
Trimming ASML
NBIM trimmed its stake in European AI company ASML in a strategic reallocation to higher growth potential and stability, as it had said last year that it was looking to reduce country risks, though there were no plans for further reductions.
"We feel pretty good with the way we are positioned just now," Tangen told Reuters.
Strong market performance, technological advancements, and AI leadership in the US may also have driven the fund’s reduction of the Netherland-based ASML stake. As of August 16, Nvidia posted gains of around 150% year-to-date (YTD), whereas ASML just over 20%.
Export restrictions to China, which account for nearly 50% of ASML’s revenues, were probably the primary reason for reducing exposure. This is especially true as European tech investments increased from 1.6% in 2023 to 1.7% in the first half of 2024, according to the earnings report.
Reallocating in France
Despite taking a more cautious stance in some European companies, Norway's sovereign wealth fund increased its stakes by 32% to $1.57 billion in the first half in several tech companies in France.
The fund reduced ownership in Alten (ATE.PA) by 67.7% and increased ownership in Atos (ATO.PA) and Capgemini (CAP.PA) by 41.4% and 36.8%, respectively, while keeping all other 15 equity allocations in French tech unchanged.
Sopra Steria (SOP.PA) and Thales (HO.PA) were new additions compared to 2023 investments, with market values of EUR 1.6 billion and EUR 3.4 billion, respectively, representing 1.26% and 1.47% ownership.
The provider of AI solutions, Sopra Steria, has partnered with major tech firms like Microsoft and Nvidia as it focuses on pooling large-scale expertise and developing structured AI solutions to deliver higher-value-added services.
Sopra Steria
Sopra Steria reported a 50.5% increase in net profit from continuing operations in its first-half report and near double-digit operating margins on business activity, primarily driven by higher selling prices and revenue growth in Benelux, Scandinavia, and Germany.
Notably, the company works on trusted and responsible AI, including AI ethics and AI’s environmental footprint. It actively develops use cases and tests them within its support functions to identify potential issues early and refine its AI solutions to ensure compliance, aligning with the AI Act's regulatory requirements.
SOP stock is trading 23% lower over the past three months after peaking at a record high of $240 per share earlier in 2024, which brought its PE ratio down to 15.5. In comparison, Europe’s equivalent of the Magnificent Seven, GRANOLAS, trades at a price 31 times earnings, which leaves Sopra substantially undervalued.
Wall Street analysts expect an upside of around 50% in the next 12 months.