AI Beyond Hype: Niche Prospects & Long-Term Investments

Published Date::03/10/2024

Artificial intelligence (AI) is making waves across industries, but investors are now looking beyond the tech titans for niche opportunities and targeted approaches.

Artificial intelligence (AI) is transforming various sectors, from autonomous vehicles to e-commerce. However, investors are shifting their focus towards more targeted approaches, identifying specific value propositions and uncovering potential beneficiaries of AI technology that markets have yet to fully appreciate.

Clients are increasingly curious about how AI can drive efficiencies in sectors with strong underlying macro themes, such as healthcare and ageing or global supply chains, said Hamza Ayub, executive director and portfolio manager at Farro Capital, referencing innovative startups using artificial intelligence.

The numbers support the growing trend of diversifying investments. The 2024 Artificial Intelligence Index report reveals that the top areas attracting investment in 2023 included AI infrastructure, research, and governance ($18.3 billion); natural language processing and customer support ($8.1 billion); and data management and processing ($5.5 billion).

Beyond sectors like medical and healthcare, autonomous vehicles (AV), fintech, quantum computing, semiconductors, and energy oil and gas are also showing significant promise.

However, scalability and illiquidity can present challenges in these investments. At Farro Capital, clients with existing exposures to major tech stocks are increasingly discussing allocating a small portion (as low as 0.5%) of their capital to promising private market opportunities. These discussions acknowledge the potential for substantial returns within a few years, despite the inherent risks.

On the public market front, investors have been increasingly exploring alternatives and competitors to the Magnificent 7 due to their high valuations, said Jason Tan, portfolio manager at PhillipCapital. Competitors like AMD, Intel, Broadcom, and Qualcomm are gaining momentum alongside Nvidia.

Investors have also been focusing on companies that stand to benefit from artificial intelligence, rather than those directly involved in technology development, said Tan. At T. Rowe Price, there is growing interest in green energy utility companies and those expanding natural gas capacity, given generative AI's high power consumption.

The time horizon for artificial intelligence investments is critical for determining returns and risk management, according to the research. These technologies often require long-term capital due to extended development, testing, and deployment periods necessary to bring innovations to market.

Industries like healthcare, autonomous vehicles, and industrial automation have varying timelines for commercialising AI applications, making it essential for investors to align their strategies with projected sector maturation. A majority of PhillipCapital’s investors in artificial intelligence favour long-term commitments, shared Tan.

FAQS:

Q: What are some niche opportunities in AI that investors are exploring?

A: Investors are looking at sectors like healthcare, autonomous vehicles, fintech, quantum computing, semiconductors, and energy oil and gas for potential beneficiaries of AI technology.

Q: What are the challenges associated with investing in AI?

A: Scalability and illiquidity can present challenges in these investments, and investors need to consider the long-term capital requirements for AI technologies.

Q: What is the time horizon for AI investments?

A: The time horizon for AI investments is critical for determining returns and risk management, and investors should consider a minimum five-year time horizon for private market opportunities.

Q: What are some public market alternatives to the Magnificent 7 in AI?

A: Competitors like AMD, Intel, Broadcom, and Qualcomm are gaining momentum alongside Nvidia, and investors are also looking at companies that stand to benefit from artificial intelligence.

Q: What is the approach of institutional investors towards AI investments?

A: Institutional investors are predominantly focused on long-term investments in AI, viewing it as a transformative technology with the potential to drive significant changes across industries over the coming decades.

More Topics :