In Stanley Kubrick’s film 2001: A Space Odyssey, an AI computer called HAL 9000 controls a spacecraft bound for Jupiter. The pleasant and seemingly subservient HAL soon begins to think independently of its human creators and turns against the crew, who have to fight for their lives against the computer.
In the 50-odd years following the film’s 1968 release, Hollywood has greatly expanded on the narrative of AI equating robots that could potentially pose a sinister threat to humans.
But Stephen Jue, a director and portfolio manager at Allianz Global Investors (AllianzGI), believes there is a long way to go before the likes of HAL become a reality. “We’re still 30 to 50 years out to where we see that dark portrayal of movies where you’ve got the true autonomous type of robots,” he said at a virtual briefing by AllianzGI on AI opportunities on April 21.
Instead, Jue believes that a human-supervised era of AI will play out in the nearer term, with AI employed to automate processes. “We will get to this general AI area where the AI is smart enough for multiple tasks, similar to human level efficiency,” he says.
Jue, who also serves as AllianzGI’s senior research analyst for US technology, firmly believes that AI will be the largest driver of disruption across global economies.
A 2017 study by PwC estimated that AI could potentially contribute US$15.7 trillion ($20.82 trillion) to global GDP by 2030.
The sheer opportunity size and increasing awareness of AI within the mainstream have made it an investment focus for many, including AllianzGI. The asset manager first launched the Allianz Global Artificial Intelligence equity fund dedicated to AI opportunities in 2016. As of Feb 28, the portfolio size stands at just under US$10 billion.
More recently, the asset manager launched the Allianz Global Intelligent Cities fund which invests in “technologies that contribute to the development of intelligent cities” across multiple asset classes. The fund currently has a portfolio size of some US$93 million
It is not just funds that are investing in AI. In 2019, the Singapore government rolled out the National AI Strategy to map out the implementation of AI to help transform the economy. A total of $500 million was pledged for AI activities under the Research, Innovation and Enterprise 2020 plan.
AI sector opportunities
Now, not all different segments or industries within the broader technology space are able to make good use of AI. Jue believes that data-centric sectors have seen the biggest integration of AI in recent years through the application of machine learning.
He points to tech companies like Facebook and Instagram as early breakthroughs, where the companies started using algorithms to detect patterns in user data to understand behaviours and deliver customised content.
Jue says those same technologies are now being applied on a broader scale, with innovations by companies in other data-intensive industries like healthcare and manufacturing. “It began on the consumer side, and it’s starting to spread over on the corporate side,” he observes.
Jue also notes that the pandemic has accelerated digital transformation, with lockdowns forcing companies and consumers to adapt. “If we look at the last year, particularly with the impact of Covid-19, this digital transformation wave really changed how we view technology and accelerated the adoption of a lot of technologies that we thought could take five or 10 years to adopt,” he says.
To that end, Jue sees near-term AI opportunities relating to automation and productivity, such as cloud computing, digital interaction platforms, and other work from anywhere-related technologies.
He also expects the rollout of next generation high speed 5G mobile networks to drive new waves of AI applications over the longer term within realms like augmented and virtual reality as well as autonomous vehicles.
Interestingly, despite the prospects for the autonomous industry, Jue is cautious on the “autonomous race”, which includes a recent slew of lidar companies looking to list via special purpose acquisition company (SPAC) deals.
“Valuations, particularly at some of these more recent SPAC-driven [deals] are pricing in a lot of future growth already with unproven products and business models,” he cautions.
Also, while he expects self-driving software to be more broadly deployed within the next five to seven years, the technology will take time to mature as standards and regulations governing the industry get put in place.
Instead, Jue believes the electrification of vehicles is the bigger opportunity at present. He anticipates that electric vehicle (EV) penetration will jump from a few percent to 15%–20% over the next five to 10 years, driven by global adoption of carbon-neutral goals and emissions standards.
To that end, Jue says he sees opportunities within the supply chain side of the EV ecosystem, including semiconductor, chip, memory and connectivity-related companies.
As of Feb 28, AllianzGI’s Intelligent Cities fund, which Jue co-manages, lists shareholdings in semiconductor and electronics players such as NXP Semiconductors, ON Semiconductor Corp, Keysight Technologies and Motorola Solutions. It also has shares in biopharma company Avantor, Honeywell International and solar power firm Enphase Energy, among others.
Meanwhile, AllianzGI’s Artificial Intelligence fund lists its biggest shareholdings in streaming hardware maker Roku, Tesla, General Electric Co, Amazon.com, social media giants Snap and Facebook, The Walt Disney Co, semiconductor maker Broadcom and software company Zoominfo Technologies (not to be confused with video tech company Zoom Video Communications).
In terms of tech stocks, Jue believes that despite the recent sell-off in the market, the fundamental growth drivers of many big tech companies are “still very good”. He expects the market to broaden out as economies continue reopening, though he expects further market volatility ahead depending on any resurgence in Covid cases.
Assessing AI companies
When it comes to AI opportunities — which is growing in tandem with the broader technology space — Jue believes a bottom-up, fundamental approach is crucial. “Some of the valuations may look pricey on next year’s estimates, [so] you do have to look out sometimes two or three years at what normalized earnings power could be for [the] companies,” he reasons.
Noting that many AI technologies are largely in earlier stages that require a lot of investment, Jue says “slightly lower” levels of profitability are acceptable during these early hyper-growth stages.
He stresses a long-term approach that allows investors to see whether prospective companies are growing and meeting milestones to support their goals. Important indicators include the availability of R&D funds, management teams that are committed to innovation, and visible developments on products as well as earnings power prospects.
Citing Nvidia Corp as an example, Jue points out how five years ago, the company was predominantly focused on gaming graphics cards before it leveraged its technology to branch out towards data centres. “A lot of stock appreciation happened in those early years when [data centres were] still a very small percentage [of the business],” he notes.
In terms of risks, Jue highlights that aside from assessing the maturity of the technology, an important consideration is the regulatory and policy frameworks that will evolve to govern the industry or product.
Ongoing discourse on the ethics of AI and its deployment will also be another factor that determines consumer sentiment and the breakthroughs that will come out of industries embracing AI in the longer run.
Ultimately, despite the challenges and shifting dynamics, Jue says every industry will have to transform to adapt to AI or risk losing out, especially coming out of Covid-19. He believes companies that proactively and genuinely invest in AI will come out of the economic downturn with greater market share gains as the technology continues to mature and drive innovation over time. Early adoption of AI will be what sets apart the winners from the losers, he says.
In the movie, HAL, for all its technological prowess, was disconnected by the surviving astronaut David Bowman. He was then “reborn”, signalling an optimistic start to the next stage of human evolution. Investors betting on AI might share this optimism.
