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Investing in artificial intelligence

3 August 2023 in Investing

This article was written by Stuart Dickson and originally published by Adam and Company.

HAL in 2001: A Space Odyssey. The replicants in Blade Runner. The Terminator and Westworld. Science fiction films that feature artificial intelligence (AI) seem particularly adept at tapping into human neuroses. The knowledge that humans can turn on each other is bad enough; the idea that mere machines could become sentient and malign seems particularly terrifying.        

Some of these films are decades old and, at the time of their release, represented a distant dystopian future. Yet AI, or the ability for computers to convincingly replicate human behaviour and understanding, has become such an integral part of our everyday lives that many are unaware of its presence. AI powers our trusted voice assistants, such as Siri and Alexa, and suggests films and songs we may like on Netflix and Spotify. It’s even helping many people on the quest to find true love by powering the algorithms on dating apps.

However, although AI may be part of the furniture in many aspects of our daily life, it’s still very much seen as the ‘new kid on the block’ when it comes to stock market investments. Read on to find out how we think AI is influencing the markets, where it features in our discretionary portfolios, and why our investment team believe it could bring opportunities for success.

Should I invest in AI?

For investors, AI represents opportunities and risks. Certain tech companies should benefit. AI requires tremendous processing power for its analysis and responses, so companies such as NVIDIA, who build the necessary data chips, are already being dubbed as ‘winners’, as they are well-placed to meet the demand. NVIDIA’s new H100 chip for data centres consists of 80 billion transistors and represents a huge jump in the ability to process data, text, voice, and images. For the moment, it far surpasses rival chips such as the king of the PC era, Intel. Faster computer processors are needed for the big data centre companies such as Microsoft, Amazon, and Google to tap the potential for their clients, so there is room still for more success for the right company. 

Another such ‘winner’, tech giant Microsoft, has introduced a product called ‘Copilot’, an AI-powered tool which sits within their applications such as Word and Excel. This promises to ‘unleash creativity, unlock productivity, and uplevel skills.’ While some still shudder at the memory of Microsoft’s previous productivity tool, the infamously upbeat paperclip ‘Clippy’, this seems to be the main selling point of AI to businesses: boosting productivity by helping users to become superhumans. This sector of AI could help scientists to discover new drug treatments more quickly, and doctors to diagnose illnesses more accurately.

Further opportunities are likely to be seen in companies that have their own proprietary datasets, such as credit agencies making better lending decisions, and companies that own legal databases producing quicker and better casework for their clients.

There will be ‘losers’, too. A recent report from Goldman Sachs* argues that sectors such as manufacturing, mining and agriculture will be largely untouched, yet many white-collar jobs could be affected, with many jobs and companies involved in information processing, computer programming, and content generation being ultimately replaced by digital automation. It could also disrupt existing giants – Google search results merely show links which might help; ChatGPT provides answers.

Paranoid android: is it too good to be true?

So, what should investors do? There have been many stock market tech fads in recent years, from cryptocurrencies to the metaverse, yet this feels more like the mid-1990s, when the internet emerged into popular consciousness as a technology which everyone soon realised would have profound effects on society, the economy, and markets. It made fortunes for some and ruined others.

The listing of Netscape in the summer of 1995 – the world’s most popular browser – kick-started a bubble in markets which did not deflate until 2000. Yet investors should be wary about this kind of hype. At that time, the dominant players were Alta Vista in search, Myspace and Friendster in social media, and Netscape in software – names that are lost to history, crushed by the emergence of quasi-monopolies in the form of Google, Amazon, and Facebook. It is not always about being first into a new technology: a company’s strategy, earnings, and valuations ultimately matter.

Some investors are now concerned with potential FOMO (‘Fear of Missing Out’) on the next Amazon or Google. At the time of writing, this year’s gains in the US stock market are almost entirely due to the rising share prices of Microsoft, NVIDIA, and a handful of big tech companies with an AI story, as well as others trying to jump on the bandwagon: FactSet reports that AI was cited by 110 of the S&P 500 companies in the most recent round of quarterly earnings.

Opportunities for AI investors

In summary, we are at the start of a technology that could shape our future in a similar way to the printing press or the internet. Therefore, a note of caution is perhaps warranted – not least because the printing press sparked religious wars which lasted centuries, and most internet investments failed.

Yet it is exciting to be on the cusp of change. Rather than try to pick the winners at this early stage, a more sensible strategy seems appropriate when considering which AI companies to invest in. If you wish to get exposure, invest in a well-diversified fund, and try to avoid those companies being disrupted, our Investment Managers are well-placed to guide clients in this ever-mutable area. To learn more about how our specialists can guide you to access AI via a well-balanced, diversified portfolio, contact your Investment Manager, or get in touch below for a no-obligation consultation.

The Potentially Large Effects of Artificial Intelligence on Economic Growth (Briggs/Kodnani), Goldman Sachs Economic Research, March 2023

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

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Stuart Dickson

Senior Investment Director

Stuart is responsible for managing discretionary portfolios for clients, including IHT portfolios. He is a member of the CGWM International Stock Selection, UK Small Cap Stock Selection and IHT Committees.

+44 (0) 131 380 9502

Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.

Investment involves risk and is not suitable for everyone.