AI’s long-term investment potential continues to ratchet up

While geopolitical tensions continue to dominate global headlines, one topic remains at the forefront of investor discourse: the technology sector – and more specifically, artificial intelligence and its long-term potential.

The subject is ubiquitous, as most agree that AI represents the most significant development of the digital age since the launch of the internet. Its potential impact on life, work, and the global economy could be enormous.

PwC research forecasts that AI has the potential to “boost global economic output by up to 15 percentage points over the next decade”, effectively adding one percentage point to annual growth rates - on par with the growth increment the world witnessed with 19th century industrialisation.¹

Much of the excitement began with the launch of the conversational AI engine ChatGPT in November 2022. The application reached almost 800 million active users in less than three years since its inception – a milestone which took the internet 13 years to achieve.²

Thanks to AI, computers can think, learn, adapt and carry out tasks and cognitive functions typically associated with human beings, while generative AI can produce text, images and video. Its onset has catalysed a wave of investment and innovation that continues to build momentum, as companies worldwide continue to invest in their AI infrastructure. 

Market rush

This excitement has been markedly reflected in stock market returns; in the US – the primary hub for AI innovation – markets have reached all-time highs on multiple occasions over the past 12 months. Tech and AI stocks have driven the best first quarter US earnings season since 2021, with growth of some 27% year on year.³ In addition, South Korea and Japan – global semiconductor powerhouses – have also seen their benchmark equity indices reach record highs this year. 

Given the stellar market run, understandably investors have questioned whether the market is heading towards another boom and bust akin to the dotcom era at the turn of the century. But we don’t believe we are there yet as - despite some high valuations - overall they are not as stretched as they were in the late 1990s. 

And while there will inevitably be winners and losers, today’s technology firms are of a very different ilk. In the dotcom period, many company valuations were based on expectations, rather than anything tangible. Today firms have very real revenues and profits, as evidenced in the recent earnings season. 

What is clear is that presently the ‘picks and shovels’ of the AI industry, i.e. those firms involved in the AI infrastructure build out – large cloud computing services, data centres, server and computing capacity, as well as semiconductors and semiconductor equipment companies – are among the immediate potential winners.

And some of the largest US tech firms are projected to allocate nearly $800 billion to capital expenditure in 2026, primarily to expand generative-AI infrastructure - a figure that analysts estimate could reach $1.1 trillion in 2027, based on the firms’ own projections.

Productivity boost

The hopes for AI and how it will impact peoples’ lives, and the global economy, presents a myriad of possibilities, especially in terms of boosting productivity. 

From an industrial perspective AI can automate routine tasks across multiple industries like manufacturing and financial services, allowing corporations to operate more efficiently and potentially lowering costs.

Consultancy McKinsey & Co. has previously forecast that generative AI and other technologies have the potential to automate work activities that currently take up 60% to 70% of employees’ time. It forecasts that its impact could add trillions of dollars in value to the global economy.⁴

AI also has the potential to create new industries much in the same way the arrival of the internet did. While, understandably, there has been much concern around AI possibly displacing workers, we equally believe the technology will ultimately usher in a new era of economic growth which could help expand job opportunities in new and emerging sectors.

A future of challenges and opportunity 

Of course, concerns over areas such as privacy and data security will rise; governments and policymakers must regulate in an unbiased and transparent manner to help tackle and prevent harm and misuse. 

AI is dominating everyday life and has been doing so for some time. AI-driven algorithms prevail across a plethora of areas, from the workplace to the movies and music we stream, to online shopping recommendations, and much more. 

Considerable investment opportunities exist extensively in both AI design and infrastructure, and companies across an ever-growing number of sectors and industries that are starting to use AI to improve their own business models. We believe AI’s long-term investment potential remains a compelling proposition.