Artificial intelligence frenzy shifts from Magnificent 7 to specialised growth plays
The artificial intelligence frenzy pushed US equity markets to new highs in early 2024, yet finding the right investments has become more challenging for asset owners.
“Investing is getting harder – it’s still real and still investable but is no longer in this easy sweet spot of acceleration and growth. The dynamics of investing now demand higher risk control,” said Katie Horne, lead portfolio analyst at T. Rowe Price, told AsianInvestor.
Investing in artificial intelligence was once more straightforward, with the Magnificent 7 driving strong returns.
The Magnificent 7 refers to a group of seven technology companies -- Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Nvidia, and Meta Platforms -- that have been driving significant market returns, especially through 2023 and 2024.
However, a more nuanced strategy may now be required.
“We want to identify companies that still have substantial growth ahead of them, focusing on insights that the market has yet to fully recognise,” Horne added.
GEARING UP FOR AI 2.0
JP Morgan echoed this view in a May 2024 report.
The investment bank sees sustained growth in artificial intelligence infrastructure providers — what it terms 'AI 1.0' — such as data centres, cloud providers, and semiconductor manufacturers.
But it also believes that much of the technology’s unrecognised value lies in software and applications, particularly in industries like healthcare, finance, and logistics — referred to as 'AI 2.0.'
Singapore-based Farro Capital, a multi-family office, meanwhile, is urging caution.
Farro Capital
“There is undoubtedly significant potential here, but we recommend against expanding your risk budget or chasing every new artificial intelligence investment,” said Hamza Ayub, executive director and portfolio manager at Farro Capital.
Market participants are undoubtedly grappling with how best to navigate the AI-driven rally, balancing short-term volatility against long-term potential.
Jason Tan, portfolio manager at PhillipCapital, described current market sentiment as a mix of “cautious optimism and fear of missing out.”
PhillipCapital
“While some asset owners are holding off for better valuations following the surge in artificial intelligence focused stocks, others are buying in now to avoid missing out on the potential long-term gains it offers,” he shared.
INVESTABLE OPTIONS
T. Rowe Price is targeting companies with unique competitive advantages in niche areas of artificial intelligence's development, reflecting a broader trend among investors to focus on specialised segments within this evolving sector.
“For instance, Taiwan Semiconductor Manufacturing Company’s market share growth and supply chain localisation will benefit Asia-based chipmakers, particularly in advanced packaging.
"Rising demand from leading tech firms indicates strong global growth potential for AI chips in the region,” noted Horne.
The asset manager is also optimistic about AI opportunities in healthcare.
Farro Capital believes that beyond the Magnificent 7 companies, value can be found in the industrial sector, including professional services firms, automation companies, semiconductors, and the power sector.
While the US remains a major hub for artificial intelligence investments, PhillipCapital sees growing interest in China due to strong local government support and substantial investments in technology research and infrastructure.
“Beyond China, Europe, particularly the UK and Germany, are seeing rising interest in AI for healthcare and finance, while Israel’s tech ecosystem and Canada’s AI research are also attracting more investments,” added Tan.