There are a few topics that are highlighted as being ‘leading themes’ for investments over the next five to ten years, including renewable energy and artificial intelligence.
Artificial Intelligence is seen as the next big technological leap that will change our world and provides huge opportunities for many companies that you may be invested in (as well as some risks.)
We have had a lot of information from our fund managers recently about AI, so thought this was a good opportunity to share the information with you.
Unprecedented uptake
To get to 100 million weekly users, this is how long it took
Mobile Phones | 16 years |
|---|---|
Internet | 7 years |
4.5 years | |
ChatGPT | 3 months |
A lot of this possibly reflects people checking it out, two of the usable programmes are ‘Perplexity’ (an AI driven search engine) and Microsoft 365 Co-Pilot.
While it is anticipated that Co-Pilot will become a core feature of business operations, it is still in it’s early days, with a few licences in a business, and appears that it will be some time before whole organisations roll out licences to all their people.
Alphinity see that there are three different areas that companies will benefit from AI:
1. Semiconductors
2. Infrastructure
3. Software Services
At present, the investment return potential for companies is being around the semi-conductor and infrastructure areas. In the future, the question is whether AI will spawn another mega company like Meta or Amazon, in the Software Services space, still a big unknown, but exciting potential.
Semiconductors – there are two leading companies that our fund managers invest in – Nvidia (see article in this newsletter) and ASML.
Many of our international fund managers have invested in ASML for a long time. Simply, ASML is a Dutch company that makes the machines that make the semi-conductors. The knowledge and technology is so detailed that the company has quite a wide moat (that means it is difficult for other companies to enter the market and be competitive). Find out more here https://www.asml.com/en
Another company that Alphinity is invested in is SK Hynix. A South Korean company, SK Hynix makes the ‘high band with memory’ that sits on the GPU’s (Graphics Processing Unit) when they are made. They have 2-3 times the number of wafers that traditional memory has, which allows AI to work on the GPU. Learn more here https://www.skhynix.com/
Infrastructure – at present, this includes the cloud platforms like Microsoft Azure, Amazon Web Services and Google Cloud and some networks.
But in the future other infrastructure is expected – including devices.
Software Services This is where fund managers see huge potential in the future, as we learn more about how AI can work and benefit us. An example of how this might work is AirBnB, who are working on transitioning from a rental property company to being ‘the ultimate concierge’. They have purchased an AI company to enable them to harness the technology.
Risks
But there are a number of risks to us as investors, as outlined by Alphinity:
1. Technology Risk – where the technology itself doesn’t work properly, or breaks
2. Supply Chain Risk – AI used a lot of energy, there are risks about power supply, land availability for the server farms, talent to build and manage the technology
3. Financial Risk – there isn’t currently a clear understanding of the return on investment for AI (but it is very early days)
4. Valuation Risk – this is the valuation that the shares are trading at. There is a danger that a stock will be tagged as ‘AI beneficiary’ and prices will rise, but to be a viable and long term investment, there needs to be associated increases in earnings per share that match these valuation increases.
5. Regulatory Risk – this could be one of the biggest risks. Moneyworks have decided not to use AI at this stage because of the Privacy risks to our clients data (see article in this newsletter about Millie not being AI). There is a balance between regulating and stifling innovation. Europe has far more regulation than the USA at present, and far less innovation has come out of Europe – which could be directly associated.
6. AI Washing – this is when companies say they are doing AI, but they aren’t really. One of the interesting points is that there are different things that are considered to be AI (hence the confusion with Robotic Process Automation RPA). When AI is talked about as the exciting new thing, it is generally referring to ‘Generative AI’ – learn more about that here: https://en.wikipedia.org/wiki/Generative_artificial_intelligence
