How to manage volatility in Artificial Intelligence (AI) Investing?

AI has multiyear growth prospects, but short term fluctuations are expected
Complementary with AI investment, non AI technology sector are bound for recovery
Upstream operators in the supply chain will drive structural growth

ESG Investing steadily advancing across Key Asian Markets

After sparking the AI craze at the start of the year, ChatGPT has become the talk of the town once again. The system's founder, who was ousted, was reinstated in less than a week's time while the company’s board underwent a major overhaul. This episode is an exemplification of the speed at which the AI industry progresses and its variability.

The launch of ChatGPT has unquestionably made a huge breakthrough in the space of AI. Through generative AI, the system is capable of, in a conversational manner, undertaking complex tasks, such as generating articles, thesis and proposals on diverse topics. Since March this year, the innovation has sparked hopes for AI applications, sending AI-related shares higher across South Korea, Taiwan and US, among other markets. Like any other growth stocks, AI firms require massive funding for research and development. But investors have qualms that the current economic environment may deem unfavourable for them given that persistently elevated interest rates could hinder investment and future development. Growth stocks, as a result, pared back earlier gains, with AI being among the first sub-sector in the tech industry to succumb to profit taking since their valuations were comparably loftier following their recent rally.

BEA Union Investment believes AI possesses multiyear growth prospects, with ample upside potential. High interest rates, however, will inevitably prompt short-term volatility within the sector. Companies with robust balance sheets will by no means be immune, albeit the impact is expected to be relatively mild. In addition, the industry is still in its infancy, with immature and evolving supply chains. For investors who are looking for alternatives that can generate streams of growth to fill the investing gap, non-AI tech shares could be areas to look into.

Smartphones and personal computers ready for cyclical recovery

Investment potentials can be found across non-AI tech sub-sectors such as electric vehicles, virtual reality/augmented reality, handsets and personal computers, which are undergoing different stages in their cycles. Our investment teams believe handsets and personal computers are worth looking into since both are reaching their cyclical bottoms and are bound for recovery.

Over the last few years, handsets and personal computers were met with back-to-back challenges: lacklustre consumer sentiment and disrupted supply chain hit by the pandemic, followed by overcapacity resulting from global economic slowdown. But we now believe both sectors have finally emerged from the doldrums and arrived at their respective inflection points. There are signs that the industries are closed to bottom and gradually accumulated the potential for a U-shaped rebound. According to global tech market research firm Counterpoint, worldwide smartphone sales grew for the first time in two years, rising about 5% in October from the previous year. Driven by rising demand from the Middle East, Africa and India, the robust performance of China’s Huawei also provided the sector an extra shot in the arm. In terms of personal computers, data from US-based tech research firm Gartner showed that although global sales fell 9% in the third quarter from the previous year, there are indications that certain manufacturers are turning the corner. Sales were improving across the board, and some even registered growth. Pent up inventories are gradually being digested, with the possibility of some degree of normalisation at the end of the year. Gartner believes corporate and consumers are about to start their replacement cycles, which could become a driver to revitalise the sector, with the newly launched Windows 11 providing an extra boost. Global sales of personal computers could see growth of about 5% next year.

Semi-Conductor Sector has long-term investment value

Smartphones and personal computers markets have reached maturity with no shortage of stocks across their supply chains, be it upstream or downstream: chip designers and manufacturers, chip-equipment makers and handset makers, among others. Chips, also known as semiconductor or semi, is key for seamlessly transmitting data. It is at the heart of tech development. The unit of a chip is a nanometer, or nm, which means one-billionth of a metre. Every tech application, AI, cloud computing, automated vehicles, computers or handsets call for different types of chips, which may involve various firms to design and manufacture. Likewise, chip equipment manufacturers may also differ.

This underscores the significance of companies operating in the upstream of the supply chain. No chips can be made without the necessary facilities and equipment. Without chips, ChatGPT, cloud computing, data centres, smartphones and personal computers will cease to function. This explains why we see greater value in upstream operators within the supply chain given their nature and stronger fundamentals will fuel structural growth potentials. For instance, an Asian leading semiconductor manufacturer recorded a fourfold increase in sales between 2012 and 2022, underscoring steady growth in the long run despite cyclical volatility.

Technological development is constantly evolving and AI possesses disruptive power to transform the world. Success is powered by innovative spirits, but it cannot be done without the support of technological advancement. The tech sector has breadth and depth with ample opportunities spanning across regions and supply chains. Being able to grasp the different stages of cycles while remaining flexible is key to a successful investment strategy.