One of the most commonly mentioned themes for 2024 is artificial intelligence and generative AI. According to multiple outlooks by several asset managers, next year will build on AI's breakthrough year with increased implementation and monetisation.
But while stocks are still soaring, there are also discussions around the viability of skyrocketing transformational stocks. Last week, we looked at the comparisons between Nvidia (NVDA) and the cautionary tale of Cisco Systems (CSCO) in 1999. However, asset managers remain largely positive, at least for the next year.
Goldman Sachs Asset Management believes in further deployment of AI despite a period of tighter funding environments, with falling inflation helping to boost the investment case. Areas to watch are the semiconductor and semiconductor capital equipment industries, as well as cybersecurity and healthcare. Signs of life in the IPO market will also help spur optimism and allow investors to access new opportunities.
In its outlook, Goldman Sachs says: “We see a disconnect between where most investors are positioned and the most compelling potential opportunities. Investors who look to complement their existing exposure to mega-cap US technology companies with allocations to other, often less well-known, technology firms, may be able to access secular winners that are relatively underappreciated by the broader market.”
HSBC Global Private Banking believes high tech valuations are warranted and is therefore keeping their overweight positions within generative AI and robots in the next year.
“The introduction of a new generation of more advanced AI software combined with the latest optical and sound sensing technologies has substantially expanded the capabilities and therefore the potential applications that can be automated.”
BlackRock, too, is overweight the AI theme in developed market stocks for the next six-to-12-month horizon, expecting it to drive overall US corporate profit growth. There are opportunities across the “technology stack” – layers of technology built on top of each other that enable further innovation, from semiconductors at the bottom, through cloud infrastructure, to data and data infrastructure, to application software at the top.
Simona Paravani-Mellinghoff, global chief investment officer of BlackRock multi-asset strategies and solutions, says: "We think we are somewhere between the first and second layers, with the last one likely coming next. We see the entire tech industry led by a handful of large tech firms pivoting their business focus to AI.
“We also find that investors are ascribing a rising economic value to these patents. Yet not all patents lead to profitable enterprises, and their future value is highly uncertain,” she says.
Lofty Valuations for AI?
Federated Hermes is one of the companies that, while mostly positive, is concerned about AI valuations at lofty levels but explains that this is the typical trajectory for transformational technology – and it is inevitable that headlines will question when the “bubble” will burst.
It adds that next year, the focus on strong AI governance will become more apparent, with a “global, yet fragmented, race towards new regulation – from the EU’s AI Act to China’s Generative AI Regulation”.
Geir Lode, head of global equities at Federated Hermes says: “There will be mistakes, there will be pockets of irrational exuberance, and no doubt the market will at some point step away from these names due to fear rather than fundamentals. We foresee 2024 as the year in which we see the first steps towards AI implementation, helping to turn the hype into reality.”
Dutch asset manager Robeco, too, is not yet convinced about the short-term impact of AI. “AI adoption is seen as a potential solution for improving productivity and reducing unit labour costs. However, so far, the supply-side potential from AI adoption has not yet translated into improved productivity figures,” the asset manager says in its outlook.
Goldman Sachs seems to be in the minority in addressing the impact AI will have on financial services and the job security within this sector. It states that AI development is important for the investment industry as the technology allows for quick and accurate processing of vast amounts of larger amounts, more complex, and less structured information.
“We expect it will become increasingly important for investors to leverage new AI techniques to systematically extract information from data to inform investment decisions, particularly in public equity markets. (…) This can be particularly valuable when investing in larger, more dispersed markets, such as small caps or emerging market equities, which have persistent informational inefficiencies.”
