AI boom fuels hunt for niche bets beyond tech titans
Artificial intelligence (AI) is making waves across industries, from autonomous vehicles to e-commerce. However, discussions are shifting toward more targeted approaches —identifying specific value propositions and uncovering potential beneficiaries of AI technology that markets have yet to fully appreciate.
Farro Capital
“Clients are increasingly curious about how AI can drive efficiencies in sectors with strong underlying macro themes, such as healthcare and ageing or global supply chains,” said Hamza Ayub executive director and portfolio manager at Farro Capital, referencing innovative startups using artificial intelligence.
The numbers support the growing trend of diversifying investments.
The 2024 Artificial Intelligence Index report reveals that the top areas attracting investment in 2023 included AI infrastructure, research, and governance ($18.3 billion); natural language processing and customer support ($8.1 billion); and data management and processing ($5.5 billion).
Beyond sectors like medical and healthcare, autonomous vehicles (AV), fintech, quantum computing, semiconductors, and energy oil and gas are also showing significant promise.
Source: 2024 Artificial Index Report: Stanford University
However, scalability and illiquidity can present challenges in these investments.
At Farro Capital, clients with existing exposures to major tech stocks are increasingly discussing allocating a small portion (as low as 0.5%) of their capital to promising private market opportunities. These discussions acknowledge the potential for substantial returns within a few years, despite the inherent risks.
“This is where niche opportunities come in. Investors don’t necessarily need to make large, multi-asset portfolio bets. Instead, it’s about managing risk, diversifying portfolio, and taking calculated chances,” Ayub told AsianInvestor.
“This exploration into less conventional investments serves not only as a practical exercise for clients but also as an intellectual pursuit, allowing them to stay ahead of the curve in a rapidly changing technological landscape,” he added.
Farro Capital operates as a multi-family office based in Singapore and Dubai.
PUBLIC MARKET PLAYS
“On the public market front, investors have been increasingly exploring alternatives and competitors to the Magnificent 7 due to their high valuations,” Jason Tan, portfolio manager at PhillipCapital told AsianInvestor.
PhillipCapital
Competitors like AMD, Intel, Broadcom, and Qualcomm are gaining momentum alongside Nvidia.
For major players such as Microsoft, Meta, Apple, Google, and Amazon, Chinese tech giants like Baidu, Tencent, Alibaba, and Pinduoduo are emerging as formidable contenders.
In the EV sector, companies like Nio, Xpeng, and Rivian are garnering attention, while firms at the intersection of AI and security—such as Palantir, Crowdstrike, and Snowflake—are being considered for their potential to provide crucial AI infrastructure.
“Investors have also been focusing on companies that stand to benefit from artificial intelligence, rather than those directly involved in technology development," said Tan.
At T. Rowe Price, there is growing interest in green energy utility companies and those expanding natural gas capacity, given generative AI's high power consumption. This trend amplifies the demand for innovations in energy efficiency and power management.
“While we’re approaching the market with more caution, there are clear catalysts that could drive AI-related businesses in the coming quarters. We're focusing on companies with a competitive edge in specific niches or processes that are critical to AI,” Katie Horne, lead portfolio analyst at T. Rowe Price.
Horne also pointed to healthcare as another sector poised for AI-driven growth.
TIME HORIZONS
The time horizon for artificial intelligence investments is critical for determining returns and risk management, according to the research.
T.Rowe Price
These technologies often require long-term capital due to extended development, testing, and deployment periods necessary to bring innovations to market.
Industries like healthcare, autonomous vehicles, and industrial automation have varying timelines for commercialising AI applications, making it essential for investors to align their strategies with projected sector maturation.
A majority of PhillipCapital’s investors in artificial intelligence favour long-term commitments, shared Tan.
“Institutional investors are predominantly focused on long-term investments in AI, viewing it as a transformative technology with the potential to drive significant changes across industries over the coming decades. This aligns with their broader investment strategies, which prioritise sustainable and steady returns over time,” he said.
Horne cautions against seeking short-term wins in AI.
“The sweet spot for us is to buy a stock as fundamentals reach a bottom and ‘stop getting worse,’ and then go on a two-plus year journey with that company,” she explained.
For Ayub, a minimum five-year time horizon should be considered when exploring these private market opportunities, ensuring that investments align with long-term growth potential.