Institutional investors hunt for new plays amid AI boom
Artificial intelligence (AI) is reshaping entire industries and creating unexpected investment opportunities, according to money managers in the region.
From reducing energy costs in data centres to personalising fashion recommendations, AI is driving innovation across sectors. Widespread adoption is also forcing investors to look beyond traditional tech companies.
The most promising opportunities may lie in firms leveraging AI to solve industry-specific problems or in those providing the essential infrastructure that power AI applications, according to Katie Horne, lead portfolio analyst at T. Rowe Price.
T.Rowe Price
"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.
This increased demand for power is opening up new investment opportunities.
"We think there will be a shortage of power and increased demand for reliable, renewable energy sources such as nuclear energy – especially for companies with commitments to green energy," she said.
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The impact of AI will also extend beyond energy needs.
"Given the demand for datacentre capacity is increasing so rapidly, there are many sub-sectors beyond power and electricity that could benefit,” said Horne.
“For example, datacentres generate high levels of heat, which require specialised cooling systems, in turn provided by industrial companies."
TECH PLAYERS
When it comes to AI companies, investors need to consider both established players and emerging contenders, said Horne.
"Mega cap tech companies have an advantage over smaller peers and we believe this will continue – the large will get larger. AI is creating contestable markets and in order to compete, you need to invest," said Horne.
However, she also points out opportunities for smaller companies: "AI can also lower the barriers to entry for newer companies able to develop disruptive technology, and we've seen this with the likes of Open AI, Perplexity and Anthropic."
For smaller-cap companies, Horne advises looking for "a specific niche, a solid business model, and high barriers to entry."
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"We like an electronic manufacturing services, 'EMS', business that produces AI-optimised servers, switches, and other customisable solutions,” she shared. “They are partnering with customers, such as a key hyperscaler, to make their computing more efficient.”
ROOM TO RUN
There is still plenty of opportunity in AI investment space, according to Matthew Cioppa, co-portfolio manager of Franklin Technology Fund.
Franklin Technology Fund
“Many semiconductor and hardware stocks have already benefitted from the AI trend, but the runway for growth is long if current trends hold. Scaling laws dictate that large language models will continue to dramatically improve as the amount of computing power increases, which incentivises ‘build’ stage participants to continue to invest,” Cioppa told AsianInvestor.
“Additionally, we’ve barely begun to see broader adoption at the application layer, so much of this trend is ahead of us,” he said.
JPMAM
Oliver Cox, equities portfolio manager for Asia Pacific at JP Morgan Asset Management, believes we are already starting to see this current bull market broaden beyond just semiconductors to hardware, as expectations about “edge AI” pick up.
This means more AI software will be used on AI-integrated devices.
“Apple’s recent announcement of upcoming AI software products was perhaps the best recent example of that,” Cox told AsianInvestor.
“However, the software and services group are still playing catch up, mainly because corporates and consumers are still working out which AI services they need, how best to use them and to how to scale usage of them,” he said.
POTENTIAL APPLICATIONS
Horne of T. Rowe Price believes the potential applications of AI are vast and 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 centres, to name just a few areas. We could start to see the size of organisations shrink, at least for a period of time, as efficiency and automation take root."
She also highlighted the potential for AI to disrupt established markets.
"AI is creating contestable markets – and this is apparent in search. Google has enjoyed a near-monopoly (~90% market share) in traditional search for about 20 years, and so far their search-related revenue has proven resilient, even with the recent advent of ChatGPT. However, we believe that search will become more competitive over time," Horne said.