The rapid adoption of generative artificial intelligence (AI) has boosted markets this year.
However, after the initial euphoria, investors are waking up to the possible risks, including the need to be highly selective in stock-picking.
Businesses ranging from information technology services and consulting to media, information and education are under portfolio managers’ microscopes to assess the potential for AI disruption.
Photo: Reuters
The overall effect on corporate profitability is seen as hugely positive. Yet, beyond Nvidia Corp and other obvious winners in the chip sector, analysts have warned there might be losers across Europe and the US.
McKinsey & Co said that generative AI could add US$7.3 trillion in value to the world economy each year and half of today’s work activities could be automated from 2030 to 2060.
However, that means corporates also face big challenges, such as redundancies and rethinking their business models, if they want to fully realize AI’s potential.
“It’s not a given that AI will only have a positive impact. There could be a deflationary effect,” said Gilles Guibout, who helps manage more than 820 billion euros (US$894.9 billion) as head of European equities at AXA Investment Managers in Paris.
In some cases, clients could negotiate price cuts, he said, while staff-light newcomers could erode existing players’ market share while they are busy redesigning their processes.
That might reduce sales growth and cause share price underperformance, especially for companies that face strong competition or where growth depends on headcount.
“Take IT services: If one hundred people are no longer needed for coding, but only half or a third of that, customers will be asking for lower prices,” Guibout said.
The latest Bank of America survey showed 29 percent of global investors do not expect AI to increase profits or jobs. That compares with 40 percent who do expect a boost.
Concerns about AI have already manifested across markets.
Shares in companies like French outsourcing firm Teleperformance SE and US-based Taskus Inc, which manage call centers and other services seen as vulnerable to being replaced by bots, have lost about 30 percent this year.
In education, the UK’s Pearson PLC slumped 15 percent one day last month after US peer Chegg Inc, down 62 percent this year, said significant student interest for the Microsoft Corp-backed ChatGPT bot was hitting customer growth.
Some analysts have said price falls have been excessive in some cases, exaggerating the concerns over earnings growth.
“There’s a lot of focus on the risks that generative AI can bring. This has ultimately become a bit overdone,” RBC Wealth Management head of equities Thomas McGarrity said.
He seemed confident over the capacity of some professional information and data providers, which own proprietary data, to integrate generative AI into their products.
Meanwhile, others remain cautious, saying the fast adoption of cheaper AI-powered offerings could slow growth as soon as order backlogs of more conventional services are fulfilled.
Lemanik Asset Management SA portfolio manager Andrea Scauri said uncertainty over AI has deterred him from investing in some IT services stocks, despite valuations looking attractive.
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