Businesses are identifying and monetising artificial intelligence (AI), with significant opportunities emerging in select hyperscalers or large cloud service providers, along with IT service companies which advise businesses on how to implement Generative AI (GenAI), according to Anton Kryachok, portfolio manager for Morgan Stanley Investment Management’s International Equity team, based in London.
“We see opportunities and invest in a significant number of data-centred companies [through our Global Sustain strategy] such as credit bureaus, information service providers, exchanges and businesses with significant amounts of proprietary data. In combination with their strong pricing power, we believe these companies should be able to identify cost opportunities to monetise AI and crucially, retain the benefits,” Mr Kryachok said.
“At the start of 2025, stock market valuations remained elevated, with the MSCI World Index multiple at 19 times, even without accounting for the Magnificent Seven, and margins around record highs. US multiples looked particularly stretched with the market concentrated in a small number of perceived GenAI winners.
“In our view this indicates GenAI stocks may be nearing their pricing peaks. Investors only need to consider the impact of DeepSeek’s unexpected AI model release, which is built on a comparatively shoestring hardware budget, to see how fragile stock markets are, and how dependent US and developed market returns are on a small number of large technology companies, which have dominated gains.
“Such new technologies could have a prolonged impact as stock markets adapt to potentially cheaper ways to advance AI. This could weigh on the prices of technology shares and the Magnificent 7 in particular, led by Nvidia, which are trading at very elevated valuations,” Mr Kryachok said.
Another caution the International Equity team are monitoring relates to the significant levels of investment in AI, which may not be met with efficiency gains, thus threatening ambitious earnings expectations built into many US stocks. Already, concerns have been raised about Microsoft’s high level of investment in AI after its January results, with AI infrastructure spending at unprecedented levels in a highly competitive space.
“In Gartner’s terms, the ‘Peak of Inflated Expectations’ may be followed by the ‘Trough of Disillusionment’,” Mr Kyrachock said.
At a time when markets are mesmerised by US AI exceptionalism, Mr Kryachok said it’s useful to take an active management approach and look beyond to the digital transformation taking hold across industries.
“Whether we’re evaluating a leading technology company, or a leader in any other sector, our approach is grounded in identifying the high quality fundamentals that drive long-term compounding. Once we believe the quality foundations are in place, we dive deeper – assessing the strength of the franchise and the ability of the management team.
“By staying selective and engaged, we look to ensure we’re investing in high quality businesses that are not simply keeping up with the current times but leading the way into the future,” he said.
According to Mr Kryachok, the US stock market and global stocks may also be weighed down by policy uncertainty in the US. “The impacts of impending tariffs and potential deregulation are not yet known, not to mention the potential second order effects from inflation.
“Even if market strength continues in 2025, which it may despite the high level of uncertainty, we believe our portfolio of global shares in the Morgan Stanley Global Sustain Strategy looks well placed in both a relative and absolute sense, even in the absence of a downturn,” he said.
