Artificial Intelligence: The Boom Is Just Beginning
Jun 3, 2024
Artificial intelligence has swiftly emerged as this generation’s dominant megatrend, potentially revolutionising society and the global economy. Investors navigating both the opportunities and hurdles would benefit from active management expertise.
Arrival of the Fourth Industrial Revolution
It may not be obvious, but artificial intelligence (AI) has actually existed for decades. We’ve all heard about or used Siri, Amazon Alexa and Google Translate—narrow forms of AI that aim to outperform humans in speed and accuracy for specific tasks like web searches.
The AI landscape, however, has shifted dramatically in just the last couple years. Explosive data generation growth along with rapid advances in computing power and algorithms are poised to transform our lives and financial markets in ways we can’t yet conceive. When the ChatGPT chatbot was released with great fanfare at the end of 2022, it unleashed a ‘Generative AI’ era that revealed opportunities for widespread consumer use and fueled a furious stock market rally. Many investors have dubbed it the ‘Fourth Industrial Revolution.’
Accelerated Adoption Rates – Number of Days Required to Reach 100 Million Users
Source: Reuters, July 2023
HOW QUICKLY WILL AI TRANSFORM SOCIETY?
Generative AI has captured the world’s collective imagination because of its unprecedented potential to transform society—what the renowned Austrian economist Joseph Schumpeter termed ‘creative destruction.’ Under this scenario, traditional tasks will be replaced by far more efficient alternatives, leading to significantly higher productivity. Multiple studies suggest that, within a decade, society will change as profoundly as it did during the first industrial revolution when the combustion engine was invented.
Generative AI, for instance, can enhance a company’s operational efficiency. By automating and overseeing various tasks, this technology frees workers from repetitive duties, enables them to focus on high-value projects, improves work quality and ensures product quality remains consistently high. Significantly heightened productivity and cost savings for companies is the result.
OPPORTUNITIES AND HURDLES IN THE AI REVOLUTION
In a world dominated by generative AI, two competitive advantage pillars would swiftly emerge: the caliber of data and the expertise of personnel, particularly workers equipped with advanced technological skills.
Moving forward, companies that blend high-quality proprietary data with personnel proficient in advanced AI systems who are capable of optimising this data and seamlessly integrating it into core business operations would secure a competitive edge. Conversely, companies with limited technological resources and a less-skilled workforce might face significant risks.
Despite this enormous potential, several hurdles could potentially hinder AI growth. First, governments and industries are still drafting AI regulations, and their final form remains unclear. Second, lawsuits have been filed regarding ownership of intellectual property that technology companies are using to build and train their AI models.
In short, the AI landscape is rapidly evolving with astronomical potential growth and investment opportunities. Yet its complexity and uncertainty pose significant challenges for investors.
| AI Types | Availability | Capability | Examples |
|---|---|---|---|
| Narrow AI | Existed for decades with expanding use cases. |
Aims to outperform humans in speed and accuracy for specific tasks (within specific parameters), such as facial recognition, internet searches and autonomous driving. |
Google Assistant, Amazon Alexa, Siri, and Google Translate |
| Generative AI | In the early stages of a long multi-year cycle. | Designed to execute specific tasks within predefined contexts, such as chatbots, multimedia content creation, and product development and design. However, it lacks the capacity to operate beyond predetermined boundaries. |
ChatGPT |
| Strong AI | Long-term vision of the future. | Focused on developing artificial general intelligence that surpasses current capabilities. | Machine autonomy |
ACTIVELY CAPITALISING ON AI OPPORTUNITIES
Generative AI has swiftly emerged as a significant stock market novelty. Particularly in the United States, it has ignited a rally among several technology companies poised to capitalise on its potential rewards. Yet, investors face a key concern: As generative AI-based services rapidly convert intelligence into a commodity, where does the competitive edge lie in a world saturated with ubiquitous AI?
AI-enabling hardware
The AI evolution currently relies heavily on hardware capabilities. As AI algorithms demand increasingly complex computations, the need for more powerful computers grows. This demand has spurred certain technology companies to develop cutting-edge microchips that can enhance computing power twenty-fold over today’s standards.
Investing with experienced investors
In 2023, AI enthusiasm sparked a robust tech stock rally, led by the market-leading ‘Magnificent Seven.’ However, many investors now question the long-term viability this group’s market leadership. Replicating recent performance will likely prove challenging for these leaders as new global growth companies develop new technology that could better meet the needs of this evolving megatrend.
Investing in growth-oriented companies is complex and demands specialised expertise. It takes time, sometimes several years, for the most innovative companies with disruptive ideas to first persuade investors to accept their ideas and then to achieve sales on a scale necessary for sustained earnings growth. Successfully investing in these growth-oriented firms requires active management expertise. It demands a discerning approach that meticulously balances opportunities with risks—a discipline exemplified by active managers such as Jennison Associates.
While it’s important to know which growth companies to buy and when, it’s equally crucial to know when to sell. Asset managers that adopt a strict selling discipline will reduce or eliminate positions when an investment’s underlying fundamentals no longer justify owning it or when superior opportunities emerge with greater upside potential.
The ability to look beyond short-term fluctuations, focus on long-term opportunities and identify prime companies positioned to capitalise on enduring trends epitomises the authentic active management investment approach.
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