Market Views: What are Asia's best AI investments?
As tech firms' stock prices surge amid the increasing demand for and confidence in artificial intelligence (AI), particularly generative AI, the entire supply chain supporting this AI boom stands to benefit significantly.
In Asia, while semiconductor manufacturers are a clear beneficiary of the AI revolution, the boom's impact extends far beyond, potentially boosting companies throughout the supply chain and in various AI-related sectors across the region.
AsianInvestor asked fund managers to identify promising sectors, markets, and strategies across Asia-Pacific that asset owners could target for AI-related investments over the next 12 months.
The following responses have been edited for brevity and clarity.
Fiona Yang, fund manager of Asian Equities
Invesco
In Asia, excitement around association to generative AI has already spread to more nascent or niche adopters or beneficiaries such as designers and manufacturers for “edge AI” chips used in smartphones. We are also taking a closer look at some of the IT services companies and consultants.
Corporate IT services spending growth has slowed due to macroeconomic concerns and higher interest rates, effectively raising the hurdle rate for implementing transformational, digital changes. However, we feel comfortable looking through the uncertainty, confident that gen-AI project demand will pick up, and that medium-term growth is being underappreciated.
Geopolitical risks linger, macro headwinds persist and valuations in some areas appear stretched. However, investment themes typically span several economic cycles, and times of volatility, such as the volatility we saw at the beginning of August, provide opportunity.
There may be bumps along the way, but absent unforeseen major shocks the combination of interest rates peaking at the same time as the semi cycle bottoms out should be a powerful driver for some AI related stocks.
Sat Duhra, portfolio manager for Asian dividend income
Janus Henderson
Whilst we own long-standing positions in many of the direct beneficiaries of the build-out of AI infrastructure, such as server hardware, semi-conductors and PC names, we have not bought any names purely on the strength of AI given the elevated valuations and uncertainty about the end demand for AI applications.
We have instead increased existing positions where our earnings growth expectations were boosted by potential AI demand in areas such as datacentres and utilities which will be key in terms of fulfilling power demand requirements and data centre expansion.
Themes such as higher grid capex, data centre expansion, infrastructure build out are compelling in themselves anyway supported by rising power demand in Asia and significant infrastructure spend in markets such as Indonesia, China and India. If the killer AI applications fail to materialise the risk has therefore been managed in the portfolio.
Even in China the grid capex from the government continues to increase to ensure that efficiency gains are achieved from upgrades and is crucial in terms of China’s longer term decarbonisation targets. In India the government has made a firm commitment to renewable energy, and we are benefitting from our utility holdings there as renewable generation capacity increases.
We are also seeing renewed investor interest in our IT services holdings in India as recent contract wins were supported by AI such as data analytics and this trend is expected to continue.
Virginie Maisonneuve, global CIO equity
Allianz Global Investors
We are positive about the key enablers of AI adoption, such as data centres, cloud providers, and the green transition, as well as the forthcoming second wave of AI.
As some stocks, particularly the Magnificent Seven companies, are richly priced, thanks to the AI boom, we would look further afield within the sector, particularly at those companies specialising in the enabling technologies of AI, such as cloud computing, data centres, and application programming interfaces (APIs)—the essential components of AI infrastructure.
As the AI ecosystem continues to develop, the impact of applied AI on companies via productivity increases will be the next phase to be recognised by capital markets – AI’s second wave. Investors should consider companies that are enabling the AI revolution, including hardware and component manufacturers, software providers, and leaders in industrial automation, with a specific interest in opportunities in Europe.
Additionally, there will be clear distinctions between winners and losers in traditional manufacturing, based on how swiftly firms can leverage new AI-driven capabilities. An active approach to portfolio management is crucial in navigating this rapidly evolving sector, allowing investors to identify and capitalize on emerging value.
Andy Budden, investment director
Capital Group
Generative AI represents a transformational shift that will lead to unprecedented investment opportunities for Asian and global investors. The challenge for investors today is to separate the hype from what matters: the pace of adoption, improvements in the models and price declines.
While most companies are still in the experimentation stage, some businesses are already tapping into the efficiency and productivity gains AI can deliver. This spans across scientific and medical discovery, consumer product development, industrial automation and robotics, as well as IT services.
It would be wise for investors to focus on the declining costs of AI adoption, advancements in models and identifying early adopters that may use the technology to gain a competitive advantage.
That said, there are considerations as we think about AI-related investments in portfolios.
Investors tend to overestimate technology’s near-term impact. It can take years before AI’s economic benefits are realised, or reflected in a company’s revenue growth, though some tech stocks already have future AI-related growth expectations priced in.
Building AI infrastructure requires many resources, including talent and energy. Resource constraints could further slow the AI rollout.
AI will be spectacular and very important. But at this point in the cycle, investors should be selective and carefully consider the risks and spend time uncovering the right opportunities.