Lazard’s Nahal on Capturing Long-Term Megatrends

US exceptionalism is dead. The US naturally has an extremely important role to be playing in what we see happening in AI the hyperscalers, you know, first and foremost specifically as we look at this you know, capex driven cycle that we're that we're entering into or just starting to

enter into. But what we really want to highlight is that I would say the deep seek of January twenty twenty five, so think back a year ago, was a bit of an eye opener that this isn't a one horse race, right, and that this is very much a global AI continuum that we're all on and we think that we're going to see more and more investors. We've seen it in the back half of twenty twenty five, we continue to expect that this will continue to take

hold in twenty twenty six. That investors are looking globally right. They understand the opportunity of the United States, but they also understand that you're going to see a lot of great innovation coming out of Asia, coming out of Europe, and that a really good way to look at the portfolios to make sure that you have a balanced exposure there. The other thing that we're highlighting is naturally we tend to be lovers of equal weight, and particularly a lover

of eical weight. In twenty twenty six, and just highlighting again that especially as we look to themes such as AI, but also across all of our innovation themes. We think that sometimes investors can get really hung up on the most well known names, right, and that's typically those big megacaps, and there tends to be a lot of US tech tunnel vision when people think of innovation, and we actually

see a lot of opportunity in lesser nor names. And that's one of the work that the matics, I think really brings to the forefront is just how much opportunity is sitting outside benchmarks. And we really expect the broad name to continue through twenty twenty six.

or in terms of technology and AI diffusion. And if I were to quote eighteen time All Star and thirteen time World Series champion Yogi Berra, the future aint what it used to be and investors need to prepare their clients for a future that is no longer predictable, no longer stable, or no longer a simple extent of the past. And these transformative and disruptive forces are no longer peripheral trends, but they've become central drivers of everything from dispersion to

volatility to disruption and ultimately long term value creation. And we can see this with the lifespan of companies in

the s and P five hundred. I was just falling from sixty years in the nineteen fifties to thirty years in the nineteen eighties to an estimated twelve to fifteen years by twenty thirty at the end of this decade, and the growth and so called Kodak moments of companies, we're simply failing to foresee and adapt to the pace of disruptive transformation, and we really see mega trends investing as offered an invaluable north star for investors looking to

adapt for the future and navigate these structural shifts. And in practice this means leveraging a bottoms up fundamental, fundamental research and valuation discipline focused approach when it comes to investment,

and we believe the software is it's two things. Firstly, it's an opportunity to invest in high quality, growing companies benefiting from structural change at a reasonable price what will refer to as themes or mega trends as a reasonable price along the lines of gart But secondly, longer term optionality from ten to twenty year themes that are currently on the investment frontier but rapidly becoming reality, so things like autonomous vehicles, humanoid robots, quantum computing, SMRs as well

as space.

as the Lazarts Global research platform. A forward looking approach is critical to timing theme selection, as you generally don't want to be buying when the theme has reached page one of the newspapers or is all across your social media, or for that matter, your parents or your grandparents.

And during this meetings we ask the CEOs and senior management strategic questions about things like structural changes over the next three to ten years, the evolution of both demand and supply, capex investments which are being underestimated or ignored by the market, and future sources of revenues and profit pools. And in essence, these collected data points allow us to both identify emerging mega trends and to focus on idiosyncratic stock factors, while also tying our mega trends to three

to five year valuations for companies. And practically speaking, each mega trend must also be able to offer durability, scale and investability across a diversified set of companies, and at present we run a concentrated portfolio of sixty names across six themes or mega trends, so that includes smart campex, smarter industry, and a new era for capital investment, bits of chips, key selective components capturing value from digitalization powered

consumer the winners in a whole new world of consumerism. Software agents, the next major evolution of software, data and AI competitive advantage from the plied AI. And then finally future health, which is focused on solutions to the societal challenges in and around healthcare.

you when to evolve or sell. And obviously we run an active ETF and our themes are dynamic and evolve off the back of our bottoms up research and the data points we're collecting from our meetings with companies and as evidence, as economics, as competitive dynamics, As policy directions change, new themes emerge, and existing themes can shrink, expand, or be retired based on our conviction. But to put things

in perspective, we are true long term investors. Of the average lifespan of our themes average is about five years, and portfolio turnover is about twenty percent per year.

the return opportunity over time. Secondly, we're looking at stock specific factors. The reality is that no stock will ever be a perfect fit for a theme, and there are many idiosyncratic factors at play, from the quality of management to worry some legacy businesses is to sustainability concerns, and these are often swept under the carpet by top down investors, but we choose to choose to go deeper, working closely

with Lazard's fundamental research team and their insights. Thirdly is valuation, where we place an overarching focus on year three so twenty twenty nine and year five twenty thirty one, and on whether the valuation is reasonable, whether there's a possibility of upside if the theme plays out, and ultimately on

capturing asymmetries. And then fourth and finally is diversification. We have multiple themes and multiple stocks per theme, and layers of diversification across market segments geographies, products, services, as well as sectors. It's very much our belief that diversification allows us to access different return profiles. And generally speaking, we equally wake themes and stocks and we regularly take profits and recycle them into strong suctual stories experiencing moments of weakness.

to ten years. And it's our belief that these are timeframes where markets tend to be less efficient and structural change is generally underappreciated, but in terms of valuation, rather than fixing target our team we work extremely closely with Thozard seventy fundamental analysts to compare with the market is discounting the consensus and price with what our differentiated long term judgments say. Valuation approaches can be flexible by company type.

We're recognizing everything from annuity like elements through to optionality. We're leveraging scenario based analysis, which helps us to calibrate materiality and avoid overpaying for popular or narrative German themes, and our valuation discipline also means that we can help our clients access the best themes and the best companies

tomorrow early and at a reasonable price. Because themes at a reasonable price, Mega trends at a reasonable price is have the heart of everything that we are trying to do. Is there any type of top down research as part of the process. Do you kind of incorporate any type

of macroeconomic or geopolitical insights into your framework? Yeah? Of course, you know, as you can imagine, macro geopolitical insights are critical for us as a Mega trens team, especially in light of the new realities of the fragmented, the transactional, the intensely competitive, multi polar world that we're living in, and we really see these inputs as key to shaping long term foundations and construction of our themes, as opposed to those who would use them for tactical positioning or

short term timing. So just to give you an example, you know, we see strategic investment in US manufacturing and industry as accelerating due to macro on geopolitical challenges. We see the scales tilting away from chasing low cost labor back towards domestic production, and we believe capital and proximity to the end user is going to dictate the national and regional allocation of capex parameters to which the US

have no equal. We also see the US as in the very early innings of a massive reindustrialization wave which could become a multi decade opportunity which we size at a minimum of ten trillion dollars in the coming years.

And as the US aims to regain the twenty to twenty five percent of global manufacturing share that it commanded in the nineties, we see an increasing focus on reshoring high value strategic supply chains and critical infrastructure, and in terms of example semis or chips, that industry is clearly

becoming one of the biggest focus areas. And if you take a look at twenty twenty five, as of July, Semi companies had announced over five hundred billion of private sector investments across twenty eight states to revitalize the US leading edge cheap chip ecosystem and move towards this whole idea of solvereign AI and US pharma manufacturing is another reshoring beneficiary with three hundred and seventy billion of investments

in two thousan twenty five. So we're looking at the macro, we're looking at the geopolitical, but we're trying to see what sort of bottom up impacts that is having in terms of our in terms of our portfolio.

of eleven years at Lazard. We have complementary backgrounds that spanned the buy and sell side, geographies, areas of study and interest, and one member was actually a former member

of a national chess team. But it's important to stress that beyond the core team is that we're collaborating throughout the day with an emphasis on cognitive diversity and collective decision making, with everything from theme and stock selections, sizing decisions, and portfolio reviews made jointly by the pms, supported by ongoing debate and shared research ownership. But it's critical to stress the importance of the inter connected insights that we

derive from the investment investment network. At Lazard, we have access to and regularly leverage a world class network of seventy sector specialists across continents who help us to construct our bottoms up vision of the world and we're an

incredibly interconnected platform. We're in constant touch with the fundamental analysts, with dedicated chat groups with each of them, as well as a firm wide big Big Picture weekly Leal Thematic meeting, which has been running at the firm for well over for well over two decades now.

all those really good ones. When you start talking about thematic, I was I was looking at the current membership and interested to hear your perspective, you know, thinking back to the question I answered David at the very beginning here, when we think about going global versus focusing on opportunity potentially being unlocked in the US, you've got a decently high waiting to us, interested to hear on if there are certain of the mega trends that you're focused on

where you are looking more global versus other ones that you're more focused on being US driven.

opportunities for long term investors. Its Secondly, exactly in line with what you're saying, we believe that we need to move away from the US to becoming more global allocation can help us navigate a shifting market performance in what really is a new regime. And Thirdly, we need to diversify from that sometimes obsessive focus on data centers and ais to more diversity across sectors, market segments as well

as companies. And then finally, as we discussed, we need to shift away from those backward looking benchmarks to being forward looking. Now, if to take a look at the portfolio itself, you know what you end up with is a portfolio which truly is global, right about sixty three percent North America and thirty seven percent rest of world, and this reflects global profit pool distribution and where many

leaders in structural change reside. So I was talking about the changes that we're seeing, for instance, in the manufacturing and renaissance space in the United States. Massive opportunity. But this is a space where we need to look towards some of the European as well as the Japanese actors as we look to instill everything from automation, digitalization software and AI based operating systems for factories through to industrial

robots as well as the emergence of humanoid robots. But if you look at the portfolio, the way that we think and the way that we act, it also results in a portfolio which is very well diversified. We've got about forty percent technology, but we have material exposure to healthcare,

to industrials, to financials as well as consumer companies. And our global approach as well as our equal weighting based philosophy basically means under exposure to megacaps even when based in the US, providing broad participations across global trends.

to sit there. Naturally, though, we've got this volatility and this tension, great opportunities to lean in when you get when you get some of this volatility, where in the AI ecosystem or which aspects of AI are you watching most closely right now, understanding that you're prioritizing where things are going to be in a three to five year window.

has and will continue to dominate the investment landscape. You know, we're anticipating about three to four trillion dollars in AI infrastructure spend by the end of this decade, and what companies are telling us is that they likely need to double compute every six months, which obviously means a three hundred to one thousand time increase over the next four to five years as they strive towards AGI or artificial

general intelligence. And if we want to put things in perspective, it's really most comparable to the nineteenth century railway boom with both of these both of these representing massive transformative

and potentially speculative investment cycles. And to put things in perspective, Gilded Age railroad investment peaked at about six percent of GDP, But if we look at AI hyperscaler Capex alone in twenty twenty five, it was about two percent of GDP, And obviously it's been increasing by the day, and a lot of people will always ask us, you know, why are we engaging in one of the costs theiest buildings

freeze in human history. You take a over the last three years of AI spend and it's greater than when it costs to build the US Interstate highway network over forty years. You know why are we seeing multi billion dollar AI factories bigger than ten home depots being built in windswept towns like Ellendale, North Dakota, which has eleven hundred people, two motels, one dollar general, and a Pentecostal

Bible college. The reality is that AI compute demand continues to exceed supply it's the fastest growing technology in history, faster than the TVs, the Internet, smartphones, or previous computing revolutions. You look at the consumer space, Chat GBT cheap one hundred million users in two months and is now close to nine hundred million. You know, that's a record for

a consumer app. We now have seventy to eighty eight percent of businesses and ninety nine percent of the Fortune five hundred who are actively deploying or exploring deploying GENAI. That compares to only ten percent two years ago, and seventy five percent of companies say that they are now completing tasks that they were never able to do before.

The reality is this is unlikely to change any time soon, given that we're only three to four years into what is likely a twenty five year investment supercycle, and that the street is consistently underestimated the cappex in this space.

But that said, you know, if we bring this to an investment and a portfolio in terms of perspectives, the long term opportunity is really going to be rooted in sentiment on ROI and return on investment, and that balance that exists between AI capabilities long term incremental revenues and

productivity and efficiency upside. And obviously we're seeing growing revenue opportunities if you look at what's happening in terms of the cloud with enterprise adoption of AI workloads, what's happening in terms of digital advertising with improved targeting an AI subscriptions, so people paying for tools and agentic services. These three areas alone represent a trillion dollars of incremental revenues over the next few years, with AI driven opex and capex

efficiencies further pushing up company offerating profit margins. But what we are really excited about is that shift from data center build out toward broader implementation and applications. So this includes AI agents across industries. AI at the edge for example with smart glasses and new form factors, and physical AI in spaces like autonomous vehicles and humanoid robots with up to fifty trillion dollars of industry set to become autonomous.

And from a macro perspective, if you go back to the macro, what I would stress is that AI could contribute up to fourteen percent of global GDP by twenty thirty and put some perspective, we're talking about fifteen point seven trillion dollar worth of GDP as AI enables automation products, decision making scale across sectors, and this is key they boost global productivity after twenty years of stagnation or decline.

You know, we're talking about nine hundred billion plus and benefits for the SMP five hundred and this translates into about sixteen trillion dollars in potential long term market value creation potential. And what companies are telling us quarter after quarter,

the reporting is improving in this regard. They're telling us about the profound productivity shifts that are coming from AI, you know, improving the efficiency of coding by eighty percent, AI speeding up drug development by eight to twelve times. AI accounting for seventy five percent of claims adjustment and underwriting in the insurance sector, all the way through to total cost of ownership savings versus humans of up to

eighty five percent in the manufacturing sector. So massive opportunities beyond the data center. Also some areas for caution, which I'm happy to get into if that might be of interest.

It is a little bit refreshing, actually a hy bit of a conversation that sometimes has been very much put on the back burner because you're not necessarily seen into the stock performance about those downstreams. So like if you know upstream AI versus downstream MAYI. It really has been a bit of the forgotten spot, I would say over the last eighteen months, if anything, maybe getting hit a little bit harder versus all that focus on the upstream and it is refreshing, just a hard thing to have

the conversations about. Is patience is a virtue in this type of situation, right totally? And I do think I do think that's something especially as you say that you guys are so focused on three to five years, is that's where you're going to start to really see those downstream acceleration of the work that got put in now and it actually paying off into some of those downstream applications and their growth. There that being said, I did notice now a couple of things. One, I'm also Canadian,

really appreciated the puck reference. Two, I will always take one of those two. I did notice that in your in your Mega trans breakdown, you also flagged something else that I'm deeply passionate about power and power being back on the agenda. I think those are the words that were maybe in something I've seen come across from your team.

which I think is really really compelling. I often break this down between two things grid tech or centralized power versus. I'm loving seeing actually the increased focus, particularly from the tech investors towards decentralized power. So I'm interested to hear your take on how your team is addressing this power being back on the agenda and how you're working that into your current ethos. Yeah.

sectors and across end markets. And just to put things in perspective, if we look at US data centers alone, you know, monthly and annual capacity editions reached record highs, record monthly eyes at one point four gigawatts in December, record annual highs in the US at ten gigawatts in twenty twenty five. Now this matters because a one gigawatt data center consumes the equivalent electricity of seven hundred and

fifty to eight hundred thousand homes. Data centers have boosted US power demand growth to the highest level in twenty years, leading to more than half of regional power markets reaching critical tightness last year. And if we look forward, we're in total agreement with you. You know, data centers could be consuming twelve percent of total electricity in the US now at gatesst Backdob. We really see investment opportunities as being

driven by for key dynamics. The first thing is going to be a focus on low cost energy to support rapid AI infrastructure growth and reshoring of industrial capabilities. This is going to include natural gas. It's also going to include decentralized power. Secondly, there needs to be an increasing focus on innovative technologies. We've seen a lot of excitement and take up with regards to nuclear and particular SMRs,

but also things like carbon capture batteries and energy storage. Thirdly, we're probably looking at a situation of global energy deflation as the US exports cheap natural gas to key global markets. And then finally, this is an area where we need to need to engage in a.

I feel like we learned those lessons, or we should have learned those lessons.

dovetailing with a national defense for capitalization. So I think that's also a really beautiful intersection, is that it's obviously been prioritized in the US, but we're seeing it prioritized throughout APEC and also through Europe, everybody not wanting to be left behind. I think this is maybe a tricky question, and to be honest, I don't know how I would answer, which is probably why I'm asking, because I'd love to.

could challenge our thematic priorities. We'll get everything from shifts in global policy direction in a multipolar world, slowing economic activity that can impact CAPEX, competitive intensity, or technological disruption, and then valuation compression if expectations run ahead of fundamentals, and if I try to bring that in perspective of some of the shorter term things that we've been seeing

in the market. As you can probably imagine, a lot of recent emphasis has been on the impact of AI on software companies, and this is an area where we've been shifting our focus away from slowing set as grows over the course of the last few years towards towards a variety of new drivers. So we're placing an increasing emphasis on outcomes rather than seats on tapping into booming AI budgets. These continued to increase, while overall IT budgets

are flat or stagnating. The rethinking of interfaces and the monetization of AI agents on top systems of record, and from a valuation perspective, you know, we're also looking at valuations which have sometimes fallen into their routines, but in light of free cash flow multiples which are even better than that, and with net cash balance sheets. But ultimately,

you know, we consider ourselves experts on structural change. That is our bread and butter, and what we're obsessively focused on is many of the emerging challenges that are ignored by shorter term investors. Just to give you a flavor, you know, we're seeing significant negative shifts in public sentiment on AI. One of the major service is on twenty twenty five is that fifty percent of Americans are now more concerned than excited about AI. You know, we're looking

at the macro impacts. AI is currently able to automate twenty five percent of all working hours. What is this going to mean in terms of the need for rescaling and upscaling. And then we're looking at things like electricity and power, which we talked about. You know, one hundred regulations in thirty states passed in the US in twenty twenty five alone, and we're now talking about things like whole set electricity auctions to fund long term contracts for

power generation capacity. All of these things are potentially on the horizon and obviously could impact the composition of the underlying portfolio.

it to David. The thing that I think twenty twenty five was most under the radar takeaway for thematic investing from my perspective was I think we're seeing institutional investors finally understand this is where you are to be front footed right, just the drag and the leg that you're inherently exposed to with some of the more traditional constructs.

I think we saw it. We saw it specifically track a lot of the global thematic ETF flows naturally, and we were seeing just based off the behavior, it was a record year for thematic etfmflow through twenty twenty five, really strong start to twenty twenty six as well. Interestingly, where we saw the biggest allocations were going to these big,

heavy structural demand type areas AI, defense, infrastructure, nuclear. I'd love to hear your opinion on the fact that we have hopefully hit that inflection point thematic investing where once upon a time it was purely thought to be a retail investor type of focus and the potential for us to be gaining some real traction amongst institutional investors.

as institutional. You know, I talked about our Yogi Bara quote at the future ain't what it used to be, but it's very much our view that, you know, thematics and mega trends are increasingly key to capturing alpha from the combination of investing in high quality growth companies benefiting from structural change put at a reasonable price, as well as longer term thematic optionality. So the alpha story is key here, but the relevance for investors goes well beyond this.

It really lies at the heart of investor's ability to retain and grow their books at business and as you alluded to, investors need to follow the follow the money, and follow the dollars. Thematic assets reach a three year high last year of seven hundred and seventy nine billion dollars globally, and this is no longer a European phenomenon. The US has been seeing the fastest growth worldwide. USAUM has grown fifty percent over the last three years, helped

again by the rise of active btfs. But secondly, we need to pay attention to the changing demographics. Forty percent of American millennials and forty percent of American gen z or gen z as we woul say in Canada, investors those aged thirty to forty five and fourteen to twenty nine, respectively, already use thematic mega trends investment. And then finally, you know, we're in the midst of the largest ever generational wealth

transfer in human history. You know, we're looking at one hundred and twenty four trillion dollars which is set to shift to younger generations in the US alone by twenty forty eight. But in an extremely worrying sign, only thirteen percent of investors retain their parents, grand parents, fa their financial advisor when the money passes hands. You know, I talked about those Code Act moments earlier, but the reality is that younger investors think and act differently than previous cohorts.

And ultimately, you know what This comes down to is that the logic and the expectations of yesteryear are becoming obsolete in a transforming world, and mega trends investing is

going to be critical to reduce the looming risk of disintermediation. So, in a nutshell, what we continue to do, what we've always done, is to urge investors, whether they're institutional or retail, as well as their end clients, to look beyond the horizon, to focus on the long term, to go global, to diversify or cross opportunities, to be forward looking, and ultimately

to capture future wealth for multiple generations to come. And at the end of the day, you know, that's what we're trying to do with Bizarred equity, mega trends or themes.