The world is changing faster than ever, and markets are moving to accommodate the accelerating pace of change. Technology has transformed every industry core to our economy, and artificial intelligence (AI) is no longer just a concept but has become a reality which has the potential to reshape business landscapes and herald a new era of innovation. Fidelity International sheds light into the innovative themes and new investment territories investors should consider beyond today’s ever changing financial landscape, and how generative AI could be a once-in-a-generation opportunity for investors.
Rethinking Global Investing
Markets have become increasingly fast moving and unpredictable, with investor sentiment increasingly being influenced by short-term noise. However, there are innovative themes and investment territories that investors with an eye to the future should consider.
Henk-Jan Rikkerink, global head of solutions & multi asset, at Fidelity International comments: “In this fast-changing world with cycles speeding up and becoming shorter, we believe that investors should remain dynamic and take a scenario-based approach. For instance, our scenario probabilities for the end of 2024 are 40 per cent for a soft landing, 30 per cent for no landing, 25 per cent for a cyclical recession, and 5 per cent for a balance sheet recession.
“We think a no landing outcome is significantly more likely than is implied in current market pricing, which places significant weight on a soft landing, particularly evident in risky assets. This means that the markets are still disregarding the potential for interest rate hikes if the no landing scenario continues to develop.
“When thinking about opportunities in tomorrow’s markets, private assets is one area that has been garnering a lot of buzz from investors, and rightfully so. For investors comfortable with lower liquidity, adding private assets could improve portfolio returns and provide additional diversification. Private equity had a drop in dealmaking in 2023, but we expect private equity funds with strong value creation strategies to do well going forward. In addition, direct lending remains attractive, especially in the middle market.
“In the past 12 months, there have been several consensus trades that have crowded the market. However, the winners of today might not be the leaders of tomorrow. We expect markets to broaden beyond large cap Tech, where extraordinary earnings are rolling over and positioning is becoming extended. US and Japan remain attractive markets, given the resilient growth in the US and positive earnings revisions as well as encouraging policies that aim to improve better corporate governance in Japan.
“Looking into opportunities in Asia, we believe that the region is cyclically in a better place, with exports picking up and China stabilising. Additionally, valuations are attractive when compared to many developed markets, and we see attractive opportunities in Korea, India, ASEAN and Japan. The Asia pre-IPO market could also be a very interesting space in the years ahead as a source of attractive returns. Asia is home to many high-quality growth companies, many of whom are choosing to stay private for longer. With a strong backlog and attractive valuations, the Asia IPO opportunity is a bright spot to look out for.”
Investing in the Age of AI
AI has the potential for widespread adoption across both tasks and industries. Studies have shown that 40 per cent of all work may be impacted by AI, be it through automation or the augmentation of jobs. These include everything from admin work to computer services, sales, financial and business operations, and more. And with these changes also comes opportunities. Generative AI is a seismic shift that could provide direct and indirect pathways to long-term growth as AI reshapes business landscapes and heralds a new era of innovation.
Taosha Wang, portfolio manager at Fidelity International comments: “While the concept of AI has existed for decades, generative AI is a more recent development that is characterised by three aspects: easy-to-use, multi-purpose and unprecedentedly rapid adoption. And unlike many internet companies in the 1990s, many leaders in generative AI today are very well funded and are often backed by the deep pockets of major Tech companies. Often referred to as the ‘iPhone moment’ for AI, generative AI has the potential to be a defining milestone that enables decades of technological disruptions and innovative business models.
“From an investment perspective, we believe AI is a structural growth theme that should not be ignored. One way to consider it is taking a ‘stacked’ approach’. At the bottom layers are hardware and infrastructure. These include both the semiconductor elements - like GPUs and memory chips - as well as physical infrastructure such as data centres and electricity equipment.
“As AI models get bigger and more powerful, they also become more complicated and energy intensive to run. This means that structurally there will be greater demand for semiconductor content, especially ones that are designed with AI in mind. Smarter and more extensive physical world infrastructure like smart grids and power equipment will also be required, especially against the backdrop of ageing infrastructure in many parts of the developed world. The bottom layers are driven by AI related capex and currently this trend remains strong. It is also easier to identify winners as several manufacturers of hardware and capital equipment are already clear leaders in their field.
“In the middle layers of the AI ‘stack’ are cloud computing and foundational models. There are already winners in these lines of business and these are often Big Tech names. They will continue to see structural growth and will need to make heavy capital expenditures in order to satisfy growing demand.
“The top layer of the AI ‘stack’ are the various applications that incorporate AI for different commercial use cases in various sectors. AI is an innovative and disruptive piece of technology that will change the way businesses are run, regardless of their home industries. The companies that incorporate this new tech productively and profitably stand to win, whereas those who fail to adapt may encounter challenges.
“The fact is, AI is here to stay. And some old business models may become obsolete while new ways of satisfying customer demand commercially will arise. The competitive landscape is most dynamic in this layer and the winners are least certain. But ultimately AI related investments will need to be justified by commercial profit from the commercial application of the technology and development in this layer is crucial to watch.”
