Investing & Performance | 12 April 2024

Artificial intelligence – The new wave of innovation

The latest generation of technology has been sweeping headlines for the past year and grabbing investors’ attention.

The latest trend getting investors excited, and some company employees hot under the collar, is artificial intelligence (AI). It’s been a focus for many businesses working to streamline their strategies and boost efficiency. This is likely to result in improved productivity, and the companies that have a stronghold on the technology are reaping the rewards.

“Look at the Covid pandemic for example. With the sudden uptick in remote working, companies like Zoom, Microsoft and Amazon saw a massive boom in business as they accommodated those working from home.”

 

Joe Aylott, Multi Asset Strategist, Coutts

Technology sector goes from strength to strength

The technology sector has been thriving for decades and has been a significant force for the US stock market in particular. It’s constantly evolving to help people, and therefore businesses, become more efficient.  

Joe Aylott, Multi Asset Strategist at Coutts, says: “Look at the Covid pandemic for example. With the sudden uptick in remote working, companies like Zoom, Microsoft and Amazon saw a massive boom in business as they accommodated those working from home.”

The potential benefits of artificial intelligence

While we might naturally think of ChatGPT when we hear ‘AI’, other forms of the technology have been around for years. For example, self-driving cars or ‘films you might like’ suggestions on your favourite streaming service use elements of AI.

We’re gradually seeing other companies implement AI into their business strategies. Klarna, the ‘buy now, pay later’ fintech firm, has started phasing it into its customer service chat bot. Announced in a press release in February, Klarna’s AI assistant, powered by OpenAI, had dealt with two-thirds of the firm’s client queries in the prior month, and the average resolution time has dropped from 11 minutes to just two minutes. 

How to invest in AI

The technology sector accounts for a large part of the US stock market – roughly 30% of the S&P 500 index. AI-associated companies, like Nvidia which creates the chips that facilitate AI, have a very positive outlook for their earnings and have bolstered the US stock market as a result.

The improved productivity that AI may facilitate for other companies could result in cost savings for them too, potentially boosting their profits and positively impacting GDP growth for the wider economy.

Roughly 80% of the US workforce could have at least 10% of their tasks affected by the introduction of large language models, according to research last year by OpenAI, the company behind ChatGPT. And with expectations that this is only going to grow, investors are eager to ride the wave.

So how could investors capitalise on this? Investing in a diversified portfolio that includes equities could offer exposure to those companies at either end of the AI supply chain. By investing in the US market for example, investors could be exposed to those offering AI solutions as well as the companies implementing them to improve productivity.

So far, much of the news coming out about AI is positive. Investors are excited by the potential it could unlock for companies, and share prices are rising as a result.

It’s worth noting though that there are high expectations among investors for the speed of AI adoption which will likely take longer than anticipated. This could cause some volatility down the road. However, for long-term investors, AI is an innovation that is likely to drive long-term productivity growth, and therefore boost GDP, earnings, and equity markets.

If you are a Coutts client and would like to learn more about how AI factors into your investments with us, please speak to your private banker in the first instance.

This article should not be taken as investment advice. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be seen as an indication of future performance. You should continue to hold cash for your short-term needs.

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