Hugo Scott-Gall: Hello, and welcome to The Active Share. Today, I’m joined by two of the sharpest minds in the business. They wrote this introduction. Olga Bitel, Global Strategist here at William Blair Investment Management, and also, Simon Fennell, who’s a portfolio manager here on our international growth, international small cap, and international leaders strategies.

We are going to dig into, let’s call it, Olga’s big thesis, which is about the revenge of the tangibles. It’s how the world is in a building phase, building out AI capability, energy systems, and also defense. Three big areas of building. Does that mean we’re in a new investment regime? Have things really changed? We’re going to get to it. I’m going to start asking Olga and Simon questions; questions they can’t avoid. Welcome to the show.

Simon Fennell: Thanks very much.

Olga Bitel: Thank you, Hugo.

Hugo Scott-Gall: Olga, I gave you a... well, I read out your script, but I gave you a big buildup there, and that we’re in a new investment regime. Are we in a new investment regime, and what was the last investment regime, if we’re in a new one now?

Olga Bitel: I think we think we are in a new investment regime, and I think there are a couple of things that have come together to bring us to the current, what we think of as, the next investment regime.

As you already said in your intro, in computer science, artificial intelligence is now being commercialized, which can bring better, easier shopping and entertainment experience to consumers, and massive, massive efficiency gains to virtually any type of company or business. And this requires vast numbers of data centers around the world, compute power.

This is semiconductors or chips, whichever language you prefer, and a lot more electricity than our relatively outdated grids can produce. And I think the second equally important development is the economic rise of China. So, today China is either at the forefront already, or is rapidly moving to the forefront of virtually every new technology and innovation that I can think of. So, from AI to nuclear power, to humanoid robots, autonomous mobility, biotech, you name it.

I think China’s extraordinarily rapid rise, or to economic ascent, if you will, is challenging the post-Cold War global order. So, in other words, we’re moving from a unipolar with U.S. as the undisputed No. 1, to a multipolar, with China on the ascent.

I think that this response to China’s rise has been America First policies, however broadly you define them, which effectively lead to more national supply chains in everything that you just said, whether it’s AI, whether it’s energy, and ultimately national defense systems. So, hence the rise or the impetus for the next building cycle, which we think we’re in now, and we probably have further to go.

Hugo Scott-Gall: So, when did the last investment regime finish?

Olga Bitel: The last investment regime was probably from the mid nineties to the mid-early 2000s, right before the global financial crisis.

And at that time, if you recall, we were building the infrastructure for our internet capabilities. So, this is laying fiber optic cable around the earth’s surface and under the oceans, which ultimately gave rise to e-commerce platforms, ride-share platforms, music and video streaming platforms; anything that required or was enabled by the internet. And of course, the second equally large force, I might argue even larger, was China was building its housing stock.

The early 90s chart, China started out with virtually zero modern day, or what we would consider modern-day housing; within roughly a decade to two decades, it built an enormous housing stock. This is quite unprecedented. And so, the things that we were building at the time, and the commodities that were required at the time, were things like iron ore, copper; largely industrial commodities that you would need for steel, copious quantities of steel.

That is what I would consider the last building cycle. So, these things move in long cycles. Every couple of decades or so, we’re due for a new one. So, mid 2020s, we’re now in the midst of the next one.

Hugo Scott-Gall: There are quite a few strands to... I think what you said, if I can repeat back, we’re in a building phase now. We’re in a building cycle now, because No. 1, we’ve got a meaningful change in the capability of technology, AI. So, we need to build out to deliver that capability, and then it diffuses with all sorts of consequences for profit pools in the economy.

The second thing you said is around defense, and that can really be linked, I think, to the rise of China, no longer in a unipolar world. Not quite everyone is on their own, having to do it for themselves, but not far off.

So, more insecurity, more do it yourself. So, there’s more defense spending. And we think about energy. There’s more demand for energy, having been flat for quite a long time, and certainly in the West; and there are aging systems. And again, there’s the security overlay. So, it’s never just one thing.

It’s really U.S. policy driving some changes, and U.S. policy is in response to some things, as well as a worldview. It’s also about an underlying change in technological capability, which again, is not fully proven, but so far feels that computing power can do more things than it could do five, 10 years ago. Is that a reasonable summary back to you, of the strands of why we’re in a building phase?

Olga Bitel: Quite good. As usual, you’re excellent and much more laconic with my answers than I am. Quite accurate, I would say.

Hugo Scott-Gall: Simon has had his hand up for about five minutes now. Always at the front of the class, always got his hand up, always got an answer. Let’s talk, Simon, about the change in the capabilities of technology. Let’s talk about AI. As an investor who’s been in the markets for a long time, you’ve seen what’s happened before.

Think about the birth of the internet and what that meant. How are you thinking about the implications from... we’ve got a lot more compute power that can do more things; some profit pools are going to change. As this diffuses, the world won’t stay the same. So, how are you thinking about the implications?

Simon Fennell: Well, the first part of that is to ask the question, is this a platform shift? We asked, is this a regime shift? Olga said yes, it is a regime shift from an investment perspective. Okay. In a technological sense, is this a platform shift? Again, to ask that question is important.

We don’t get platform shifts very often. And you mentioned the internet, but we can look through two or three, maybe four of them in the last 25 years. The internet boom starting in the summer of ‘95, arguably as Netscape goes public, finishing in 2000. The mobile boom that’s moving the fixed telephony into mobile happened alongside, perhaps a little bit later on, moving into smartphone.

Third, I put the cloud element in there, as well. These are platform shifts that result in huge amounts of growth, and exactly what a platform shift would entail, everybody moves. And as you move from the old to the new, a whole host of TAMs arrive. Things that you hadn’t thought of before are built on the new platform as you see it. Now, it can be cloud services. It could be mobile services, as well.

This AI one does seem to be a little bit different, in that what we’re actually asking the compute to be able to do is something that humans have only done before; something around judgment, something around intelligence itself. If it was mobile telephony, there’s something around movement. Okay, that feels different.

And we have had movement before, whether it was the car, whether it’s been the plane. But an element of judgment does seem to be very different, because we’ve got whole TAMs that have been built on judgment, not least in the financial area, that we’ve now got a challenge to.

So, is this a platform shift? Yes, it is. How quickly is it being diffused through the system? Well, we can see, by the take-up of ChatGPT to 900 million active users, this is the fastest ramp of a consumer product ever, and that is meaning that the movement of this platform shift is probably more significant. As I said, there’s also an element of it that is actually sourcing intellect, intuition, judgment; elements that had been very human before.

And so, that makes a difference to what we’re seeing. Now, we don’t have, as yet, the new applications on top. That’s something that the entrepreneurial element around the world will leap into this void very quickly. We don’t have the Uber. We don’t have the Facebook. We don’t have the Google, arguably, yet, although there’s clearly a lot of jockeying for it. What it means is that those TAMs are changing aggressively.

This platform shift is going to hurt previous incumbents very significantly. Now, arguably, it did before. And certainly, if you move from fixed to mobile, you can see that. Arguably, you could see that in cloud, as well. But this one seems very significant. We move into discussions about whether bubbles often accompany these types of shifts, and they do, but this one would seem to change the TAM availability very significantly. 

And that’s very exciting, from an investment perspective. It also can be worrying, because the previous incumbents are now under pressure, and the new arrivals start taking and creating new markets very quickly.

Hugo Scott-Gall: As I said, you’ve been at this a long time. How hard do you find the mindset shift required when things change?

Simon Fennell: So, there’s an old line, the first thing that dies in your life is your taste in music. And there’s something that’s hardwired into your head, perhaps as a teenager, that you like X, Y, Z, as music, and you come back to it time and time again. From this side, in a mindset scenario, one has to sometimes force oneself to listen to new music; to look, to see what’s happening, because if you’re an investor that is invested in the incumbent, you have to constantly challenge yourself to say that the incumbency could be over. It could be over.

Now, again, we don’t necessarily always think that we’re in this paradigm shift, this investment regime shift, this platform shift. So, you have to test that thesis over and over again. I think it is complex and difficult and challenging to change your taste in music, and perhaps your taste in stocks, but this is very important for us to do.

We don’t want to constantly say there’s a new regime in the investment industry every second Thursday of the month. However, this time it is very significant. We can see that by the amount of capital that’s being put into it. We can see that by the implications that it has for the incumbency.

Frankly, we can see it in the implications in terms of returns that we’ve seen in industry and sector and geography this year. It is difficult to change your mindset, but it’s crucial that you challenge your own biases, predispositions, and portfolio, all the time.

Hugo Scott-Gall: So, Olga, on that mindset question, or really an acceptance and realization that the future might not look like the past, certainly in the last few years, and maybe even the start of this year, U.S. exceptionalism was a phrase never far from many people’s lips. However, that’s not what has happened this year.

Could you talk about why you think the next whatever X years–call it three, five years–may well look different in terms of where growth resides geographically, and also therefore in likely performance of different equity markets? I don’t think everyone would have predicted that one of the world’s best performing equity markets this year was Korea or China.

And if you look at the lead tables, the U.S. is lower down; bottom half, not top half. So, can you talk about that, the broadening out of growth geographically, and the mindset shift perhaps required to understand that growth is now in different places?

Olga Bitel: Sure. So, if we talk about us exceptionalism, as you more narrowly just defined it, in terms of specifically stock market or financial markets performance: look, the response to America First policy really just means stronger and broader national growth around the world. So, in Europe, it means investing in national and pan-European physical, digital energy infrastructure and the like.

In China, it means removing local impediments to protecting local champions, and allowing sector and industry consolidation, such that the winners can actually earn some decent margins, together with perhaps a more services driven domestic consumption, as China moves up the GDP per capital scale. In Canada, their response to America First policies means that it’s removing barriers to inter-provincial, east-west, if you will, economic interdependence.

So, for emerging markets, it’s a little bit back to a previous building cycle, which means supplying more of the commodities necessary to build out artificial intelligence and physical infrastructure. So, more growth from more places means more investment opportunities from basically every corner of the globe, and not just the U.S.

If you look at the total addressable markets that Simon referenced briefly: in the last decade or so–in the broadly speaking post-GFC world; so, the 2010s or s  what were the total addressable markets? We’re talking about e-commerce. We’re talking about digital advertising. We’re talking about the internet economy, the mobile telephony economy.

And so, that’s roughly a TAM of $1 - $2 trillion, call it. Nothing to sneer at. But if you look at the TAMs that we’re talking about here, building out and in many cases duplicating national defense capabilities using the most modern technologies available...

This is no longer about tanks and brawn, but about drones, about low-earth-orbit enabled satellite connectivity; it is about autonomous systems, whether for mobility or for offense, and as importantly for defense; all these sorts of things, AI obviously, as Simon just talked about, all of these come from all kinds of different places.

We’re talking about places like Korea, like Japan. China, obviously, is present in all of these. We’re talking about, increasingly, pockets of Europe. We’re talking about, already mentioned Canada, Australia, the U.S., of course. It’s not to say that U.S. won’t participate in this. Indeed, it is, and in many cases, it’s still leading.

It just means that in terms of growth and returns, U.S. will no longer be the only game in town, like it was in the 2010s. And so, the returns, to your point about this year, are going to come from lots of different places and different industries and sector pockets.

And so, we as international and global investors will be able to find growth, and find interesting improvement and returns from all kinds of places.

Hugo Scott-Gall: You brought up the mid-90s through to 2008, the GFC, the Great Financial Crisis. In the 2000 through to 2008 period, the U.S. equity market was actually not that strong of a performer, relative to others in dollar terms, because you had a depreciation of the dollar. And really, that was reflecting, I think, what you just said, which was growth was good at the U.S. in that period.

No question, but it was also very good in other places. History rhymes, it never precisely repeats, but do you think we’re in a phase like that again, where there is a lot of building elsewhere in the world, driving growth elsewhere in the world, which may well mean possible depreciation of the dollar, and therefore dollar returns being more attractive outside of the U.S.? Is that my forcing you to a conclusion you don’t want to make?

Olga Bitel: Not at all. This could be one outcome of this. Indeed, the direction of the dollar from here is going to largely depend on growth differentials between U.S. and all of these other jurisdictions. So, if we see Europe starting to grow a little bit stronger–again, not a top performer by any means; we’re not talking about China or India growth rates–but we’re talking about moving from effectively stagnation, to one to two percent growth rates.

If we’re talking about national revival in Japan–and indeed, Japan has already exited deflation, and so, we’re talking about volume plus pricing growth, and so, much stronger nominal GDP growth moving forward–the growth wedge between U.S. and other major jurisdictions can very much begin to shrink on a more meaningful, durable basis, and that would argue for a depreciating, not appreciating dollar.

And of course, interest rates play a huge role in this. So, if growth is stronger, that means your nominal interest rates are higher. And so, we’re starting to see that around the world. So, the yield differentials, again, between what you’re getting in the fixed income markets in the U.S., and what you’re now able to get in Europe, Japan, and all sorts of other jurisdictions around the world, is also shrinking.

If you recall five, seven years ago, we were looking at all sorts of places with negative yields. That was unheard of. Now there aren’t any. So, growth differentials and yield differentials on a go-forward basis could very well put us in a scenario where the dollar is depreciating for perfectly reasonable and benign reasons.

Hugo Scott-Gall: I’ll ask you this question first, Olga, and then go to Simon, which is, bringing the strands of what we’ve been talking about so far, and of your thesis together, I think implies that A, the location of growth is moving, when you think about geographies.

But it also is going to be moving when you think about sectors, because when you’re building stuff, it’s industries that build stuff that have growth. So, my question is this. We’re quality growth investors. By quality, we mean companies with high returns versus low returns. By growth, growth means growth. I think you’re going to say it doesn’t matter, but does the fact that the growth rate of maybe some lower quality industries that have at the starting point, lower returns, does that matter, as a quality growth investor?

Because I think you’re going to say you’ve just got to follow the growth, and where growth is, is a lead indicator of where quality will be, because growth improves returns. So, is it a challenge, do you think, to get your head around, that actually, building in the world kind of lower-quality industries, is that an investing challenge, or is that an investing opportunity?

After you answer, I’m going to throw it to you, Simon, as a practitioner.

Olga Bitel: Well, in true economist fashion, I’ll say that it’s both. So, to borrow Simon’s analogy from earlier, it’s a bit like the music that you’ve learned as a teenager, right? So, we’re now saying we’re in a different investment regime. We’re looking at optically lower-quality companies, especially if we define companies, quality companies, on return on invested capital. And so, if you’re a builder, however broadly you define that, means your capital base is much bigger.

So, all else equal, that means your return on invested capital. So, the ratio is smaller. And so, this could be very challenging, especially if you’re a younger investor and financial markets are disproportionately skewed to many, many younger investors. So, somebody who matriculated in the profession in the last 20 years will have gotten used to thinking of high-quality companies as largely intangible businesses, right?

That is the challenge, because nominally, some of these builders may appear to be, to your point, of lower quality; not only because their capital base is bigger, but also, frankly, because there hasn’t really been much building. And so, there hasn’t been much growth. And so, that makes it look optically less attractive, from a quality perspective. However, investing is all about the rate of change in the improvement.

The improvement in quality could be extraordinarily rewarding, in terms of generating return, and as you rightly said, the opportunity–and here, I totally agree with you–is that growth often leads the improvement in quality, the subsequent improvement in the return on invested capital, and that magical combination usually results in very, very significant returns.

It’s very exciting. It is indeed an opportunity. But it does require a slight mind shift reset, if you will, to look at opportunities, investment opportunities, growth opportunities, in places where maybe in the last decade to two decades, we haven’t had to look.

Simon Fennell: If we try to define that last decade a little bit further, the idea pushed by Larry Summers, of secular stagnation, was one that was, I think, pretty well embraced by most areas; that we had growth, but it wasn’t very aggressive growth. We had some elements of stagnation in the economy. We had areas of growth, but in the aggregate level, it was a fairly blah type of growth. And I think, if we look at various sectors post the GFC, let’s just take the banks. The banks in Europe, for instance, weren’t really

We spoke to people at the Bank of England a long time ago who almost articulated that the banks would not be allowed to make that type of return, almost as a penance for what they’d done to the rest of us. Now, that penance was paid 10 years on. You’ll see the European banks are the best performing sector this year in Europe. Now, why is that the case?

Well, to both of your points, it’s because of change. The change that banks have been allowed to make a return; they’ve been allowed to buy back stock; hell, they might even be allowed to merge with some others. That’s produced rates of growth that are much higher. It’s a better interest-rate environment for them, as well. So, that’s why we’ve seen that element of performance.

The mindset shift and the change is to embrace that dynamic, to embrace that Delta. And after a long period of time where we were interested in tangibles only–they were the best return companies–the rise of the intangibles was a deeply felt and held belief by many investors because, hell, it worked.

Now, this shift, this change, the significance of it, I think, is to follow the delta rather than follow your own previous loves of music, and look for where it’s being played now, and what the shift is that’s out there; whether it’s a vibe shift or not, whether it’s a musical shift, whether it’s an inflation or interest rate shift, but those shifts are on.

They’re being exacerbated by the potential of a platform shift, technologically. And yes, it is a challenge to embrace all of those elements, because especially if the previous regime had gone on for a long period of time, arguably with not that much volatility after the GFC, of course, that actually, the rebuilding of balance sheets, or the rebuilding of various industries occur slightly out of plain sight.

And suddenly, when growth arrives, and it comes in strange places, perhaps where you least expected, that as it’s channeled into the equity market or even the bond market, as Olga said, you get very significant appreciation, very quickly. I think you’ve seen that this year with banks. I think you’ve seen it with metals.

I think you’ve seen it with various parts of the tech ecosystem. I think it’s just going to continue; not necessarily in exactly the same places. But wow, there is growth now, and it’s growth for a whole host of different reasons. But I think that the mindset shift of the investor has to be alert and open to how that dynamic is moving around the world.

Hugo Scott-Gall: Simon, thinking about the mega trend we’ve really seen in equity markets, which has been the build-out of AI, how do you think about trying to work out when is enough enough? When has enough been built? How to think about who wins, who loses, in what phases?

Does history help? You were around in the ‘90s. You saw Cisco, I think, has just retaken its high from 2000. How do you think about the patterns? How do you think about the first order, second order consequences as an investor, when you have such a powerful theme, which is, I don’t know the true correlation of the U.S. equity market to the AI theme, but an awful lot of companies have been affected by it directly and indirectly.

Simon Fennell: I think there are various approaches to try to look at it. We look at some of the scholarship around it, some of the academic works around it. People like Carlotta Perez are incredibly instructive about the nature of cycles of booms. There’s actually even perhaps almost a revisionist Perez argument around the positive elements of this kind of capital mania that goes on. Look, the first thing is to say, look, is this a platform shift? And I think all of us here would agree that it is.

Secondly, what happens is the market starts to look for what’s always described as the picks and shovels. Who are the enablers of this platform shift? Who seems to be early in the curve upstream, in order to allow this shift to occur? Now, we’ve seen that with the likes of Nvidia, with the likes of the underlying silicon behind all of this, from a semiconductor perspective, including the semiconductor equipment companies themselves.

That has been... I’m not saying that it’s finished, but it’s pretty well understood. Now we’re moving into a second build-out phase of that. That build-out phase includes the data centers, of which everybody seems to be an expert, and try to understand how the data centers will be planned, built, and certainly how the energy will get towards them.

We haven’t got really that close to any of the underlying applications, although it is very interesting that we’re beginning to see differences between the main labs and the main models that are coming out, about whether we’re seeing who’s going to be the winner in consumer. Is it going to be OpenAI? Who’s going to be the winner in enterprise? Who might be the winner in sovereign?

And are there different models that seem to be pushing towards some of these TAMs, or some of these focus areas that we’ve got? I think we’ve seen all of that before. We’ve seen also elements here in which we start using debt instead of just pure equity risk capital. Debt gets put on board pretty quickly, both to accentuate returns, and perhaps for speedy elements. And I think that we’ve got that, as well.

What we don’t have as yet is an interesting or reliable mechanism for free cash flow from the underlying models themselves. I think that’s why next year is so fascinating, to see whether OpenAI is going to move towards a consumer option, probably designed by Johnny Ive, in order to start giving it an element of this will be the platform physically on OpenAI, and then the business models will come.

When Google went public, the idea of the nature of its business model was still quite alien. We knew what it was. We knew how to use it. But I don’t think that the market was really understanding exactly how the free cash flow would work from the nature of the ads. That became clear after they’d gone public.

Now, that might be exactly the case next year, because we’re going to get IPOs from a whole host of interesting companies, whether it’s Anthropic, or SpaceX, or OpenAI, and beyond. And they’re going to have to start looking at business models to justify valuations that will come in the very serious billion/trillion mark.

And from that side, when one worries about a model that’s been too exploited, or gets into bubble territory, again, we want to see that the free cash flow can occur. If we go back to Google and you see, okay, what multiple did Google actually come public at? If you push forward five or 10 years, it was the biggest bargain ever. But we couldn’t see how that model would look. Because we can’t see how the model is going to turn out now, it’s clear that the elements of bubble can start being attributed to it.

There’s an annoying wait and see element for the investor. We’re excited about the potential for AI, but we don’t know how the free cash flow is actually going to work. And some of the numbers that have been putting out against these companies, boy, they are very elevated indeed. Can they all win? Will it just be another winner-takes-all scenario? We don’t know that, as yet.

In retrospect, of course, it will all clear. We’ll say, “That was obvious.” But right now, I think the amount of capital that’s going in, you could see that there are elements of bubble that are going alongside that.

What we don’t know is how great the business model that will come out on the back of this great technology. Google, as the example, might be the greatest business model ever. What’s more impressive? Is that Google’s technology, or is it Google’s business model? Interestingly, they both are so elegant that it led to levels of value creation are just extraordinary.

Hugo Scott-Gall: Olga, as an economist, how do you think about what’s happening with regard to AI? Is this, your gut feel, genuinely transformational? Are we looking at a rewiring of economies globally, with tremendous implications for who owns profit pools, and indeed, who has jobs?

Olga Bitel: Well, that’s probably a multi-trillion dollar question, Hugo. In terms of AI’s potential on the here and now–and by the here and now, I mean in the next, say, five years–just like Simon, I do believe that AI’s potential is transformational.

Perhaps less on the consumer side, which is where we’ve seen the early forays into the internet have the greatest impact, but more on the efficiency gains that virtually every company can extract. If AI delivers on its potential, and there’s every indication that it does, as an efficiency driver, the amounts of costs you can take out of every business are just enormous.

The way you can do things faster, easier, more seamlessly; the way you can integrate your back office functions; the way you can see prices, drive procurement, bring down information barriers; it’s just extraordinary. And so, every business, physical or virtual, can see tremendous efficiency gains and better margins than, I think, we’ve ever seen before. That’s the near term. And this is before we’ve even talked about the potential that is only now beginning to be realized, further out on the science frontier.

Using AI to discover new materials we desperately need for the next leg of growth in nuclear, or even in semiconductors that are powering AI. Discovering new healthcare applications. Indeed, even understanding how the human body works. So, I think the CEO of Eli Lilly was recently quoted as saying that today we understand about 10 percent of human biology. I would be surprised if it’s actually that high.

So, can AI help us to understand and model human organs in real time? Imagine the information that scientists and doctors would extract just by being able to understand what is happening in a human body, never mind all the different heterogeneities and permutations. So, the possibilities here are indeed very exciting, and they’re, dare I say, endless. In terms of the implication on labor markets, this gets a little tricky.

So, I am, on a longer-term horizon, very much an optimist. Every new wave of radically transformative technology has led to more jobs, not fewer. So, in the second half of the 19th century, over 50 percent of U.S. labor market was in agriculture. By the early 1900s, that number was less than 10 percent, even though U.S. labor force has grown by leaps and bounds in that 50-year time period.

More recently, in the 50s, I think something like a million and a half people in the U.S. were classified as typists. Okay, there aren’t any typists today, I don’t think, but yet we’re all typists, right? And yet, the labor force has grown again. So, the number of occupations, industries, types of businesses that every new technological wave creates vastly exceeds what it destroys. However–and this is a big however–the losers are usually highly concentrated.

Somebody who is in their 50s, or maybe even late 50s, and is quite close to retirement, it’s difficult to retrain. It’s difficult to move to a different industry to update your skillset. There could be redundancies. It might be difficult. So, we as society need to figure out how to help people, how to transition them. More fundamentally, we again, humans across the board, need to do a good job, a better job of training people such that they have the skills that today’s and crucially tomorrow’s businesses need.

And right now, across much of the developed world–and this is particularly acute in the United States–there’s a massive disconnect between what our education system produces in terms of occupations and skills, and what the current business world requires. And that is a huge source of friction, social discontent, and the like, and that definitely needs to be addressed.

The oncoming wave of AI innovations will only exacerbate that, if we do not address this and turn this into a massive opportunity.

Hugo Scott-Gall: We’re in a different investment regime from, say, the mid ‘90s through to 2008, and then from 2008, perhaps through to, say, 2021, because growth has changed for a whole number of reasons that we discussed, because as a result of growth changing, interest rates are higher. So, things are different. Do you feel that this investment regime is set to last for some time, because of the nature of the things we’re building, and then the productive uses of that?

Or do you think this has been a shorter sort of flurry of activity post the ending of COVID, or actually the seeds of this were built, were sown much earlier? So, question first to you Olga, which is, can this last for quite some time, or are we talking this is all kind of done and dusted in the next couple of years?

Olga Bitel: No, this will last at least several years, several more years. So, we reckon we’re entering Year 4 of the current cycle. So, we still have at least a few more years to go.

Hugo Scott-Gall: Simon?

Simon Fennell: I think there would be another five years of this cycle, at least. I don’t think you get these platform shifts that move on fortnightly cycles. I think it’s a much longer term scenario, not least because the build-out of some of these areas is so significant. Let’s take defense. There really wasn’t a defense cycle, or if it was, it was pretty much negative for 40 years, after the end of the cold war up until Ukraine.

Really, there was no growth to speak of. In fact, to say that there was a defense cycle would be to overstate it. It was just down. As you rebuild, it takes a long time in order to restock, to rearm, to rethink, and reposition. That’s not a two-year view. That’s a 10-to-12-year view.

From the tech side, again, I think what will be interesting there is to see, as the data center spend spools up–and as the product, whether the models themselves, or even the applications on top–how long do they sustain? We might look back at the nature of the internet element and say, “Wow, that really was a very long cycle. That went on,” because maybe the AI cycle will be quicker, but I think that it’s probably at least another five years from there.

And again, in a tangible revenge of the tangibles, those elements, in contrast to their digital cousins, it takes time to build a mine, to start looking, as you change fracking techniques; as you start looking in terms of building. It takes a lot of time. And so, I think from that side, you’re probably going to be in that cycle for a little bit.

Inflation and interest rates are probably going to remain around there, because we’ve got an element of inflation. We can see rates ticking higher. Having been at three and a half thousand year lows during COVID, they’re now moving higher. So, I think all of those are becoming a little bit embedded inside the economy itself. I think that there is also an element that we haven’t necessarily talked about, although you both mentioned South Korea, of grand power politics around this.

There is an admission by countries, by sovereigns, that they need to grow, that they need to be involved in this next platform shift. And in fact, if you’re not, you’ll be left behind. And I think that that element, again, will probably mean that we’ve got a slightly longer period to this cycle, to this platform shift. If the UK doesn’t become AI savvy, compliant, understanding, it risks a lot, as does France, Italy, Latin America. It’s, I think, incumbent on the sovereigns to pick this up. as well.

And I think that we’re beginning to see that in terms of the way that states and companies, technology companies and corporates, are moving more in step with the state as you get to build this next version of this tangible economy. So, I think it means it’s fair set for a while from here, and that four years in, we’ve got another good four or five years to go.

Hugo Scott-Gall: Final question. Is this an exciting time to be an investor? Yes or no? Olga.

Olga Bitel: Absolutely exciting time. It’s always an exciting time to be an investor, but there are so many things changing, and change is always super exciting. It is an absolutely terrific and probably very rewarding time to be an investor.

Simon Fennell: Totally agree. Totally agree.

Hugo Scott-Gall: Brilliant. Well, look, thank you both for coming on the show, as always. That’s 2026 sorted out. So, that’s great. Thank you.

Simon Fennell: Thank you, Hugo. Thanks, Olga.

Olga Bitel: Thanks, Hugo. Thank you, guys.

Hugo Scott-Gall: Thank you for listening to today’s episode of The Active Share. The Active Share is available on iTunes, Google Podcasts, TuneIn, and Spotify. And if you’d like, please leave us a review. To hear additional insights from William Blair Investment Management, visit us at active.williamblair.com and follow us on Instagram at William Blair IM.

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