AI boom will lead to new investment plays – and regulatory scrutiny
The artificial intelligence (AI) industry is facing a pivotal moment, with regulatory shifts and new entrants redefining the competitive landscape.
Institutions will be watching these developments with great interest as they mull the next big investment bet.
WTW
"We believe AI will come under increasing regulatory scrutiny in coming years in a range of markets – we are already seeing this in the US and Europe. One aspect of this will be in terms of the concentration of critical AI sectors such as semiconductors production and software platforms integral to the development of AI tools," Andrew Zurawski, chief economist, Asia Pacific at advisory firm WTW, told AsianInvestor.
This changing regulatory environment, combined with the rise of innovative startups, is likely to foster a more diverse and competitive AI ecosystem.
While tech giants have spearheaded the initial phase of AI investment and development, history suggests that disruptive newcomers can play a pivotal role in shaping technological advancement, he said.
“We have already seen some significant contribution to AI technology from some key startups and the history of new technologies suggests these can be significant.”
SECOND PHASE
Despite a widespread perception that early gains have already been realised, Zurawski contends that substantial opportunities remain.
"Our assessment is that the early gains of AI have been concentrated in the share prices of a small number of large tech companies directly involved in the supply of semiconductors and the development of AI tools,” he said.
“There is likely to be a secondary and more important phase to the impact of AI for investors in terms of the larger potential opportunities for broader equities over the medium to long run."
Also read: AI boom broadens investment landscape beyond tech giants
This perspective indicates that the AI market is far from saturated, and investors should look beyond current tech leaders to identify future growth avenues.
Franklin Technology Fund
Matthew Cioppa, co-portfolio manager of the Franklin Technology Fund, echoes this sentiment.
"Many semiconductor and hardware stocks have already benefitted from the AI trend, but the runway for growth is long if current trends hold. Additionally, we've barely begun to see broader adoption at the application layer, so much of this trend is ahead of us," Cioppa told AsianInvestor.
BROADER INTERGRATION
As the AI market matures, a shift from the initial dominance of tech giants to a more pervasive adoption across various economic sectors is likely, explained Zurawski.
"The main driver of these gains would be through the implementation of AI technology in the broader economy and the implications on productivity, earnings and equity returns,” he said.
T.Rowe Price
The transition towards broader integration presents opportunities for investors to gain exposure to AI-driven growth across a wider spectrum of industries and companies.
These effects will be far-reaching according to Katie Horne, lead portfolio analyst at T. Rowe Price.
Also read: Market Views: How sustainable is AI's escalating energy demand?
"Complex AI requires a vast amount of computing power and some companies in infrastructure build-out mode are consuming enough electricity to run a small city," Horne told AsianInvestor.
The increased demand for power will open up new investment opportunities in sectors such as renewable energy and industrial cooling systems, she said.
DRIVING GAINS
The long-term outlook for AI's impact on economic growth and productivity is promising but uncertain according to Zurawski.
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Key AI applications expected to drive substantial economic value include product R&D, software engineering, and supply chain optimisation.
“However, as we have noted, we see the potential for AI to impact most sectors of the economy and it is likely that there will be applications that have yet to be envisioned by the market which end up being influential in the future," he said.
T. Rowe Price’s Horne believes that AI’s potential could reshape entire industries.
"AI is likely going to reduce company headcount over the long-term, as it'll likely drive productivity boosts in coding, back office, automation, and call centers, to name just a few areas,” said Horne.
“We could start to see the size of organisations shrink, at least for a period of time, as efficiency and automation take root."