AI, particularly in the realm of generative AI, is largely expected to change the way business is conducted in 2024, according to Morningstar.
Morningstar’s 2024 outlook has labelled the pace at which AI has entered the market as “remarkable”, with cumulative flows into AI and big data thematic funds having quickly surpassed $15 billion in 2023, while this figure was in the red in September 2020.
“While we’d warn investors not to let hype dominate their investment decisions, we are seeing a tremendous shift in the make-up of equity markets, which are worthy of note for all investor types,” the research house said.
While this presents an opportunity for investors to enhance their portfolios, Morningstar underscored the importance of discerning “hype from reality”.
Namely, regulation was highlighted as a prominent risk in 2024, with governments and regulators globally scrutinising its technological capabilities.
Morningstar said: “While it is widely acknowledged as a force for good, [AI] also creates significant threats. We do expect regulation, although this will be regional and the big policy changes are likely to come in 2025.”
“Even well-informed investors have limited insight into the distant future. We shouldn’t assume that because a company seems insulated from AI risks today that it will remain protected in five years’ time.”
The firm added that even fast-growing businesses, including those in the AI space, can be poor investments if investors overpay for shares.
As such, Morningstar suggested that investors proceed with caution, noting that the largest portion of a growth company’s value is derived from cash flows generated in the future.
“This is a very expensive race with significant uncertainty about who the future winners and losers will be. A lot has to go right for the primary AI stocks to continue to deliver, which could happen, but the risk-to-reward can deteriorate if investors overpay.”
However, the research house expects that one of the more attractive undervalued opportunities, and an effective way to access the AI theme without paying huge valuation premiums, will be via second derivative plays, such as data management providers that host enterprise data on which artificial intelligence models are run.
Moreover, data centers will likely experience a long tailwind from the explosion of growth in AI as this will require a great deal of computing power and data storage.
“These are not the chip makers or those that offer technology interfaces, but rather, those who can effectively embed AI into their workflow and drive new revenue growth opportunities. The principles of good investing still apply,” Morningstar concluded.
