How you could profit from the AI revolution

By ANNE ASHWORTH

Updated:

This week brought more reminders that the spread of artificial intelligence (AI) is a sci-fi scenario fast becoming a reality.

Such is the seismic shift that this technology could spark in education, healthcare, manufacturing, transport and even farming, that you should be regularly assessing your portfolio.

Spending on AI made up 1 per cent of corporate IT budgets in 2023. This year it could increase to 8 per cent-10 per cent, as what the US investment giant BlackRock calls a 'multi-country, multi-sector AI-centred investment cycle' unfolds.

At the Davos economic summit in Switzerland, the International Monetary Fund boss Kristalina Georgieva, emphasised the challenges and the opportunities.

'We are on the brink of a technological revolution that could jump start productivity, boost global growth and raise incomes around the world,' she said.

'Yet it could also replace jobs and deepen inequality.'

To date, generative AI has given the biggest boost to shares in Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – 'the Magnificent Seven'.

But no-one can accurately predict the full scope of the change set to be brought by generative AI – which can produce audio, text and computer code.

However, one thing is sure, AI needs data – lots of data.

These terabytes of data – one electrical vehicle produces four terabytes every day – require a vast digital infrastructure, composed of communication towers, data centres, energy storage and fibre networks.

Wall Street analyst Susan Anderson of Cannaccord Genuity said this month that we are only in the 'early innings of a Cambrian explosion of AI-native applications'.

These are products and services whose existence will be made enabled by AI.

Anderson argues that among the winners could be software group HubSpot and agriculture machinery giant Deere which aims to usher in 'fully autonomous farming' by 2030.

Amid the excitement, it is worth noting that veteran fund manager Terry Smith is sceptical, contending that 'the adoption of AI may lead to a situation where everyone has it, so no one has any advantage'.

Yet the US National Bureau of Economic Research (NBER) believes that AI will make companies more profitable, and so raise their market values.

Against this background, it makes sense to continue to hold the Magnificent Seven. They are brimming with cash and know-how.

Indeed Nvidia, the $1.4 trillion maker of the semiconductor chips that power generative AI, is still rated a buy, although its price has trebled to $565 since 2021. Brokers Keybanc have raised their target price from $650 to $740.

Generative AI has been largely developed in the US by Microsoft-owned OpenAI, which is why investors have, to date, focused on American companies.

But in 2024, it could pay to turn your attention towards UK names like accounting software group Sage where generative AI is forecast to produce further growth.

If you already have shares in this FTSE 100 business, it seems worth staying on board.

Dan Boardman-Weston of BRI Wealth Management likes another FTSE 100 member, the analytics group RELX.

He says: 'Generative AI provides RELX with the scope to deliver significant value for its clients. Its Lexis+ AI product, which can draft legal documents in a matter of seconds, is improving efficiency for lawyers.'

Sage and RELX are holdings in the Finsbury Growth & Income investment trust whose share price is currently at a 7 per cent discount to its net asset value (NAV).

Maybe AI enthusiasm could inspire a reassessment of the trust's potential which would be gratifying to its loyal investors?

Scottish Mortgage, another trust that has tested the patience of its loyal followers, is at a 10 per cent discount.

But Boardman-Weston argues that this trust's AI exposure should alter perceptions, which is also the opinion of Winterflood analyst Shavar Halberstadt.

The AI beneficiaries range from the Dutch semiconductor equipment maker ASML to 10 X Genomics, a life sciences pioneer.

The trust's controversial unlisted holdings are the key cause of the discount. Yet they include ByteDance, the Tik Tok group, and drone delivery business Zipline whose development will be aided by AI advances.

Scottish Mortgage already has a place in my portfolio – and it will be joined by other AI-related investments. You may be alarmed over the impact of AI on society.

But, as an investor, you should not only profit from the revolution, but also have a voice in the upheaval.

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