While the ideas behind artificial intelligence (AI) have been around longer than most investors have been alive, an area which had previously been regarded as the preserve of computer science departments has gone mainstream. Even so, the AI revolution is still in its infancy.
The key foundation models – the neural networks of AI trained on huge data sets – are rapidly increasing in size, delivering major gains in capability with each iteration. It will be interesting to see to what extent Google’s new Gemini model, which is due to be released this autumn, is an improvement on the large language models (LLMs) currently in use.
The wave of interest in generative AI is testament to the core attractions of the technology sector and its ability to find new growth.
When Microsoft founder Bill Gates said of LLMs: “I knew I had just seen the most important advance in technology since the graphical user interface", he wasn't exaggerating. Such technology will create numerous business and investment opportunities in the years to come.
To see how these might emerge, it is useful to compare the burst of innovation taking place today with the rise of the Internet in the 1990s. The Internet proved relatively slow to take off as it took time to build up connectivity around the globe; in 1990 only half a percent of the global population was online. Similar observations can be made of AI.
At present, most of what is being invested into AI is flowing to infrastructure. Companies like Google, Microsoft, Amazon, Meta and Tesla are still constrained by the availability of high-performance graphics processing units (GPUs) that are needed for both model training and inference. But once the infrastructure is built, the next wave of investment will see AI models rolled out into applications.
The potential breadth of these applications looks almost limitless. Healthcare drug discovery and diagnosis, education, art, finance will each be transformed by AI in time. And that, in turn, will fuel demand for new software, hardware and semiconductors.
Microsoft’s GitHub Copilot (for code generation) is one of the most successful scaled AI-based applications today. Globally, companies report a 20-40 per cent increase in developer efficiency from using Copilot, at a cost of around USD230 a year for enterprise users. Soon there will be Copilots for everything.
One development that distinguishes this tech investment cycle from its predecessors is that it favours incumbent technology companies over new entrants.
Today, established firms are frequently the ones leading in AI. There are several reasons why. To begin with, AI requires large amounts of data and training AI models is extremely expensive - making it easier for large, scaled companies to develop than for start-ups. Similarly, almost every firm can integrate with the LLMs - there is no natural advantage for start-ups here. Finally, AI favours companies with large existing user bases, since new AI product capabilities will be easier to roll out across well-established products. For investors, that means there are many attractive opportunities to gain exposure to the AI theme via larger, established listed technology companies.
While the long-term promise is there, caution is always warranted. Tech consultancy Gartner recently summarised the feeling of a number of commentators (and investors) when it said AI was currently at the “peak of inflated expectations”.
That means investors seeking AI opportunities will need to become more selective. It will become increasingly important to understand the nature of individual products and the competitive positioning of the different companies operating within the industry. We also think that time to revenue is an important issue. This is the kind of work we in the Pictet Digital investment team are focusing on, identifying the companies for which the investment case has firm foundations.
We are clearly at the beginning of another major technology shift, one that will transform most technology (and non-technology) markets over time. It is inspiring to see how quickly companies are adapting to take advantage of AI. We look forward to seeing the break-out products that start to define this new AI era.
John Gladwyn is a senior investment manager within the Thematic Technology team at Pictet Asset Management. To learn more about the team’s capabilities please click here.
Important legal information
This marketing material is issued by Pictet Asset Management (Europe) S.A.. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The latest version of the fund‘s prospectus, Pre-Contractual Template (PCT) when applicable, Key Information Document (KID), annual and semi-annual reports must be read before investing. They are available free of charge in English on www.assetmanagement.pictet or in paper copy at Pictet Asset Management (Europe) S.A., 6B, rue du Fort Niedergruenewald, L-2226 Luxembourg, or at the office of the fund local agent, distributor or centralizing agent if any.
The KID is also available in the local language of each country where the compartment is registered. The prospectus, the PCT when applicable, and the annual and semi-annual reports may also be available in other languages, please refer to the website for other available languages. Only the latest version of these documents may be relied upon as the basis for investment decisions.
The summary of investor rights (in English and in the different languages of our website) is available here and at www.assetmanagement.pictet under the heading "Resources", at the bottom of the page.
The list of countries where the fund is registered can be obtained at all times from Pictet Asset Management (Europe) S.A., which may decide to terminate the arrangements made for the marketing of the fund or compartments of the fund in any given country.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. The management company has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested.
The investment guidelines are internal guidelines which are subject to change at any time and without any notice within the limits of the fund's prospectus. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a specific security is not a recommendation to buy or sell that security. Effective allocations are subject to change and may have changed since the date of the marketing material.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares.
Any index data referenced herein remains the property of the Data Vendor. Data Vendor Disclaimers are available on assetmanagement.pictet in the “Resources” section of the footer. This document is a marketing communication issued by Pictet Asset Management and is not in scope for any MiFID II/MiFIR requirements specifically related to investment research. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any products or services offered or distributed by Pictet Asset Management.
Pictet AM has not acquired any rights or license to reproduce the trademarks, logos or images set out in this document except that it holds the rights to use any entity of the Pictet group trademarks. For illustrative purposes only.