AI: The new frontier of investing

Artificial intelligence (AI), the technology where computers and other machines attempt to simulate human intelligence – often for problem-solving purposes, has turned the investing landscape on its head over the past year or so. 

While AI is not new, its extraordinary rise of late – best exemplified by Open AI’s ChatGPT release in 2022 – has companies scrambling to integrate the technology in one way or the other. According to FactSet data, of companies that conducted Q4 2023 earnings calls from 15 December through 14 March, 179 cited the term “AI” – this is well above the five-year average of 73. 

To-date, the big winner of the AI boom has been Nvidia – the semiconductor company that makes a large proportion of the chips that power many AI applications. Its shares rose about 150% in the first half of 2024 and have gained more than 700% since the start of 2023, as of 30 June 2024. Meanwhile, Microsoft’s financial investment and close partnership with Open AI has also made it an early beneficiary of the AI-led stock market rally.

With companies deploying more and more capital to AI, we breakdown some of the key areas that could define its role and how it could shape investing decisions.

While technology and communications services appear to be the early winners of the AI boom (notably the ‘Magnificent Seven’), other sectors are making strides and the use cases for AI among them are growing. Some of these sectors we’d like to highlight include healthcare, financial services and data centres. 

The healthcare industry has already made some significant breakthroughs using AI. AI-based medical systems can analyse patterns in peoples’ medical records – both current and historical – and predict underlying risks and assist with diagnoses making the process both more efficient and creating better outcomes for patients through early detection and customised treatments. 

As an example, over the past couple of years, researchers at The Massachusetts Institute of Technology (MIT) have had success using AI to both detect certain cancers and to locate where a patient’s cancer arose making treatments more successful. This is just one instance of the many real-world examples where AI has impacted healthcare outcomes of late. 

With an aging population, and shrinking workforce to support them, healthcare appears to be a sector that is set to benefit from the widespread adoption and improvements in AI. 

Elsewhere, the financial services industry has a leg-up on some competitors through its access to a plethora of customer data. Using AI technology, these firms can undertake functions such as fraud detection, eliminating manual processes, and other tasks that enhance productivity. 

Finally, data centres are uniquely positioned to benefit from AI-related applications. Given the vast amount of computing power and data storage required by many AI applications, data centre-functionality is fast becoming one of the biggest growth areas for capital investment. During the first quarter of 2024, Microsoft, Amazon and Alphabet (the parent company of Google) announced billions of dollars of capital investment in data centres to support the growth of its AI operations.

It’s one thing to invest in companies that could benefit from the expansion of AI into various sectors, but another way we see AI integration, is in the investment process itself – how investment managers use the technology to better improve outcomes.

In research, AI’s capacity to gather, sort and analyse droves of data – and eliminate human error at the same time – will be an integral tool for investment managers. AI can – among other things – summarise data, spot trends and anomalies that the human eye cannot. This by no means removes human capabilities and intuition, but it serves as a tool to complement the existing frameworks investors use in their decision-making. Moreover, data is an important instrument for eliminating bias – something that all humans possess.

Elsewhere, as AI-generated tools enhance, they could improve the trading process itself through lowering execution costs and rebalancing portfolios in real-time.

The speed to which AI is becoming ubiquitous in our everyday lives is raising concerns about its impact on individuals’ rights, which is why regulation is set to be an integral part in the coming months and years.

The European Union (EU) has been the first to move, passing its AI Act in March 2024, which is a broad framework that classifies different use cases by risk category – unacceptable, high, limited and minimal.

“The EU regulatory framework may constrain the timing of introducing new AI based innovations but doesn’t appear to significantly impact the available opportunity. It’s also possible that higher regulatory burdens will favour more established companies, but it is too early to say at this point”, our international fund manager, Vontobel, told us.

The regulatory situation in the US is a little more opaque largely due to the litigious nature of corporate America, where many court cases slow proceedings.

As we watch the surge in share prices of the major players in AI, and the investment that companies are making in the technology, it may seem like a sure thing. However, there are risks worth highlighting.

Firstly, companies may find as they forge ahead that the financial returns do not warrant the size of the investment. This would likely weigh on sentiment, and share prices given these steep valuations some of the AI beneficiaries are trading at.

Secondly, and more importantly, is understanding the social impacts of AI. One of the narratives that is thrown around is “AI is going to replace humans”. If this is the case – even if on a small scale – then we need to start thinking about social safety nets and putting protocols in place to reskill and retrain workers.

Despite these risks, there is no doubt that in one form or another, AI is here to stay. While the landscape may seem crowded, dominated by a handful of companies, we believe that as AI evolves, the use-cases for it will grow, increasing the opportunities to benefit from this technology.

As an active manager, it is our job to stay on top of this ever-changing technology, and as things evolve, we will ensure to keep our investors abreast of how we are approaching the technology.