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Diversify tech exposures to best exploit AI thematic: Zenith

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By Rhea Nath
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4 minute read

As investors seek winners among the “Magnificent Seven” when it comes to artificial intelligence, Zenith has proposed a more diversified and long-term approach towards the thematic.

While acknowledging the benefits of a “healthy allocation” to artificial intelligence, Zenith Investment Partners believes portfolios shouldn’t rely solely on particular stock picks.

Explaining the appeal behind AI exposures, Zenith investment consultant Calvin Richardson said most investors are banking on its perceived productivity gains and subsequent revenue boosts from the adoption of this technology, including chatbots and increased automation.

“Productivity enhancements could enable businesses to be run smarter, harder and faster – which ultimately reduces costs and increases profits,” he said.

“Furthermore, there’s the incremental revenue opportunities where companies can monetise their existing customer base. For example, our largest international shares holding, Microsoft, will charge an additional fee to users who utilise their ‘co-pilot’ product, which is an AI feature that integrates into Word, Excel, PowerPoint, Outlook and Teams.”

Consequently, embedding themselves within their customer base could strengthen the competitive advantage and moat of businesses like Microsoft, he said.

Amid the AI wave last year, the tech-heavy Nasdaq index rose over 40 per cent to deliver its best performance since 2020, and investors rushed to make the most of these gains.

They particularly sought out the Magnificent Seven stocks, with chipmaker Nvidia emerging top of the pack as its stock soared over 250 per cent in the last 12 months.

Others in the Magnificent Seven have also benefited from AI exposures in their own ways. Microsoft, which placed early bets on OpenAI and its product ChatGPT, was up 59.9 per cent for the year as was Alphabet (up 54 per cent) with its own highly-anticipated AI model, Gemini.

Mr Richardson observed that this group of tech stocks have become “eponymous with the AI hype”.

“However, their stretched valuations have gathered considerable attention following their rapid ascent over the last 12 months,” he said.

“Whilst we’re sympathetic to these concerns, as long-term capital allocators, it’s critical for us to partner with fund managers who thoroughly understand the immediate and longer-term risks and opportunities presented by innovative technologies, such as AI.”

He highlighted the prudent approach of spreading exposures across stocks rather than trying to pick specific winners.

“Our portfolios have retained a robust allocation to the AI thematic through our technology exposures, yet without relying on a concentrated bet on these tailwinds,” Mr Richardson explained.

“In addition to Microsoft, our second largest international holding, Alphabet, is likewise aggressively competing in the AI arms race. Most recently, this has been through their newly launched generative AI model capable of ingesting video, audio and text, to rival Microsoft’s investment in ChatGPT.”

He added: “Apple also features prominently in our portfolios and is similarly investing heavily in AI. Relatable examples of this include enhancing how users can search for photos in their iPhone (i.e. searching via location), interacting with Siri and Face ID.”

In making allocations to the thematic, the investment executive signalled the need to embrace change, given the forward-looking nature of markets.

“The share market’s incredulous rise over the last 12 months defied many prominent forecasters’ expectations that a deteriorating global growth backdrop, negative sentiment, sticky inflation and rising interest rates would dampen market returns,” he said.

“And although market lows are never obvious at the time, the ensuing market recovery last year contradicted the accepted wisdom of the crowd and highlights the forward-looking nature of the market.”

Importantly, while markets reached near-record-high returns, these returns “weren’t generated in a straight line”, Mr Richardson added, signalling the need for thoughtful stock selection and thick skin in the face of short-term downturns.

“Remember that there will always be a nascent issue which could potentially derail your returns; however, if you wait for perfect clarity, the share market will be expensive by the time you find it,” he said.