Open any newspaper and you’ll see pages brimming with stories of generative AI revolutionising business practices. The waves generative AI has been making specifically in the financial advisory sector have also not gone unnoticed, with news of it being leveraged to create financial plans and asset allocations proliferating and ushering in a new era of productivity and automation. Despite some debate around the risks and rewards of Generative Pre-Trained Transformers (GPTs), a widespread consensus exists: GPTs cannot be overlooked.
However, one aspect that has been less talked about is the potential for generative AI to create new opportunities for asset managers and stock pickers. According to Acumen Research and Consulting data, the generative AI market has the potential to grow at a CAGR of 34.3 percent between 2022 and 2030, reaching $110.8bn by 2030.
The launch of the first mass-market version of Chat GPT in November 2022 revived investors’ confidence in the tech sector, bringing back to prominence an industry that had dominated asset managers’ portfolios for a decade, and showcasing its strong potential to investors who were left alarmed by its decline in 2022 and were close to declaring its decade-long reign dead.
On investor calls everywhere, mentions of generative AI coupled with a surge in investor interest have skyrocketed. Global and local venture capital (VC) and investment management firms such as Sequoia, Andreessen Horowitz, and UAE-based Annex Investments, have been quick to recognise the potential of generative AI, and according to the latest data by Crunchbase, $50bn have been invested in the AI sector in 2023.
According to research by the Stanford Institute for Human-Centred Artificial Intelligence and the Goldman Sachs Economic Research team, private AI investment is forecast to approach $200bn globally by 2025. The Middle East business landscape is also set to be revolutionised by generative AI. According to a study from Boston Consulting Group (BCG), the Middle East is leading the way in terms of AI investments, with 93 percent of C-suite executives looking to increase investment in AI and Generative AI in 2024.
According to another report by Strategy & Middle East, generative AI has been said to have the potential to help GCC countries reap $23.5bn in economic benefits by 2030, with the UAE and KSA projected to gain almost 75 percent of that from the emerging technology.
So is it time to climb aboard the tech rocket after the sector’s stunning performance in 2023?
Investing in the generative AI sector offers unparalleled potential for asset managers and stock pickers, positioning investors at the forefront of a burgeoning technological frontier.
Generative AI companies often enjoy first-mover advantages, establishing great barriers to entry for potential competitors which can translate into sustainable revenue streams and profitability. Additionally, the compounding effect of technological advancements and expanding applications of generative AI is likely to fuel exponential growth in shareholder value. The versatility and ability of generative AI to permeate a variety of industries also allow the sector to remain relevant to evolving market demands.
However, a few considerations are worth keeping in mind before jumping with both feet in.
The first thing to note is that many companies have seen their valuations run far ahead of their growth forecasts because, as we know, the market does not wait. So caution is required, about the sector in general and the semiconductor segment in particular: In the short term, we see more value in equipment manufacturers than in chip makers and designers.
Although the US still leads the way with a number of obvious opportunities ranging from mega-caps to smaller companies, Europe and Asia also have some attractive companies that are key suppliers to the semiconductor industry. However, opportunities must be measured against the companies’ valuations and the investment cycle in the semiconductor industry, which is seeing secular growth but still subject to large cyclical swings.
Secondly, where a company is perceived to be under threat from ChatGPT and Bard, the market has been indiscriminate. Giants such as Adobe, Accenture and Intuit initially suffered from the idea that their services could be bypassed by powerful algorithms, whereas these companies actually regard generative AI as an excellent revenue opportunity and productivity tool.
Focussing on cash flow return on investment (CFROI®) allows to focus on genuine value creation, making it possible to maintain a steady course, favouring companies capable of increasing their CFROI or keeping it stable despite the competition while steering clear of the many companies that have been exciting investors on the basis of unrealistic assumptions.
On a global scale, other concerns also remain, which should not be overlooked. Potentially tougher regulation on the sector looms around the corner, intellectual property and consumer protection issues are unlikely to leave regulators’ minds in the near future, and the significant electricity consumption that stems from high performance computing is being raised by the environmentally conscious.
However, one thing remains certain. Generative AI has the potential to revolutionise every industry, and the financial one is no exception. And although the disruption caused by AI will extend far beyond the stock market, we at UBP consider it an opportunity not to be missed for Middle East based stock-pickers and active asset managers.