S&P Global —26 August 2024
Daily Update: August 26, 2024
The Convenient Timing of Generative AI
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
2022 looked to be a grim year for technology’s titans. The cloud business that had kept margins chunky was beginning to show signs of softness. Valuations predicated on future growth were being questioned. Gravity was returning to the weightless environment of big tech. Then on Nov. 30, 2022, a nonprofit with an unusual governance structure called OpenAI announced the release of a new model called ChatGPT.
Whether generative AI will become a paradigm-bending technology like the internet remains an open question. S&P Global Ratings forecasts that global IT spending will remain at 8% for 2024. Enterprise IT continues to spend on cloud transitions, but other expenditures have been under tighter scrutiny.
At a superficial level, significant amounts of money are being spent on AI technology. S&P Global Ratings projects that global AI spending will grow into the high-20% area through 2028 when it will be 14% of total global IT spending, up from 6% in 2023. But the current spending is mostly capital outlays on AI datacenters from hyperscalers that anticipate that their large corporate customers will soon be in the market for generative AI offerings.
Capital expenditure has jumped for Amazon, Microsoft and Google. Spending on property, plant and equipment net of depreciation has increased 183% for Amazon, 75% for Alphabet and 164% for Microsoft since 2019, according to S&P Global Market Intelligence. Building out these datacenters has created a huge jump in demand for the high-end chips used in AI applications and an explosive growth in memory prices. S&P Global Ratings projects that US hyperscale spending will increase in the mid-40% area for the year, compared to a previous estimate of about 30%.
The big tech companies believe that a market exists for the AI capabilities they are building out at such a huge cost. In quarterly earnings calls, Amazon, Microsoft and Alphabet touted their AI credentials and plans to invest ahead of an expected market shift enabled by large language models. Despite experiencing slower growth in the face of economic uncertainty, they are spending aggressively on developing large language models and associated tools, delivered through a cloud platform.
“If you look at the really significant leading large language models, they take many years to build and many billions of dollars to build,” Amazon CEO Andy Jassy said during a 2023 earnings call.. “And there will be a small number of companies that want to invest that time and money, and we'll be one of them."
Today is Monday, August 26, 2024, and here is today’s essential intelligence.
China's ETS May Remain Powerless In Decarbonizing Thermal Power Sector
China's national compliance carbon market may not evolve into the country's primary tool to decarbonize its coal-fired power sector, due to the government's reluctance to give free rein to market forces and resistance from influential bodies in the thermal power sector. This is likely to mean that China's national emission trading scheme, or ETS, which was launched on July 16, 2021, is unlikely to tighten its rules significantly, until its main regulator, the Ministry of Ecology and Environment or MEE, is given more enforcement authority.
—Read the article from S&P Global Commodity Insights
Flash UK PMI Signals Faster Economic Growth And Lower Inflation In August
August is witnessing a welcome combination of stronger economic growth, improved job creation and lower inflation, according to provisional PMI survey data. Both manufacturing and service sectors are reporting solid output growth and increased job gains as business confidence remains elevated by historical standards. Although GDP growth looks set to weaken in the third quarter compared to the impressive gains seen in the first half of the year, the PMI is indicative of the economy expanding at a reasonably solid quarterly rate of around 0.3%.
—Read the article from S&P Global Market Intelligence
Your Three Minutes In China Infrastructure REITs: Hard Reality For China LGFVs
By some estimates, China's LGFVs collectively have more than Chinese renminbi (RMB) 180 trillion in total assets, as of end 2023. In theory, REITs could be a useful tool for monetizing these assets, aiding in deleveraging. In practice, however, LGFVs and local state-owned enterprises have listed 24 REITs that have raised just over RMB80 billion since China piloted the instrument in 2021, a fraction of their funding needs. The REITs' underlying assets were just 2% of the sponsors' total assets.
—Read the article from S&P Global Ratings
Listen: China's Slowing Economy Spells A Downturn For US Crude Exports
Economic growth has slowed in China, cutting into US crude exports and softening spot price differentials for US Gulf Mars crude. The expected supply surplus stemming from reduced Chinese buying has also helped to cushion the bullish impacts of the ongoing war between Israel and Hamas, keeping oil futures in a well-worn range. Jeff Mower speaks with US crude reporter Laura Huchzermeyer, crude analyst Ian Stewart and oil futures editor Chris van Moessner about the current arbitrage economics for US crude to Asia and Europe, as well as the timeline and indicators for Chinese demand recovery.
—Listen and subscribe to the podcast from S&P Global Commodity Insights
Rising PJM Capacity Prices Lift Returns For All Assets
The tenfold increase in the cleared price for the 2025-26 Base Residual Auction is estimated to boost revenue for wind, solar and gas plants within the footprint of the PJM Interconnection LLC. Updated capacity market parameters — including an increased aggregate reliability requirement and updated effective load carrying capability (ELCC) assignments — are responsible for the increase in the clearing price, which is forecast to remain high for the next 10 years.
—Read the article from S&P Global Market Intelligence
Investor Interest In Women's Sports Skyrocketing
Rising interest in women's sports among fans is leading to better media deals and record-setting spending by investors. Recently, WFC LA Inc., known as Angel City, was acquired by Walt Disney CEO Bob Iger and Willow Bay, dean of the USC Annenberg School for Communication and Journalism, for a record sum of $250 million. The previous record for a National Women's Soccer League team was set just a few months before when the San Diego Wave was sold for $120 million. In the WNBA, Seattle Storm Foundation sold a stake in 2023 at a $151 million valuation. The growth in valuations of teams has been extraordinary, with teams seeing double- and triple-digit compound annual growth rates.
—Read the article from S&P Global Market Intelligence
India Forward: Emerging Perspectives
Join us for the inaugural launch of India Forward: Emerging Perspectives, a collaborative insight and India-focused thought leadership initiative by S&P Global and CRISIL (An S&P Global company). S&P Global and CRISIL have assembled their world-class analysts, data experts, economists and researchers to offer essential perspectives on local and global factors across sectors that will shape the India journey in these crucial years ahead and would like to invite you to an exclusive event to launch the report.
—Register for the in-person event from S&P Global