SIGNS that equity investors are getting cold feet over the rapid advances in artificial intelligence (AI) leaders have put a spotlight on some less obvious beneficiaries of the technology boom.
A sevenfold surge in shares of Nvidia since the launch of ChatGPT in late 2022 helped drive a megacap-led rally around the world. But concerns over the sustainability of those gains as well as geopolitical tensions and shifts in global monetary policy are now driving a broadening of the market amid a hunt for new drivers.
Investors are selling AI giants to snap up smaller stocks and defensives that had lagged behind. That rotation coincides with the AI theme’s expansion to areas beyond chips and software, including the vast amounts of power and land the technology requires as well as what industries may eventually benefit from its implementation.
“Speculatively, we have seen some emergence of AI-related trades outside of tech and communications,” though those two groups still dominate, Gina Martin Adams, chief equity strategist for Bloomberg Intelligence, said in a recent webinar. Utilities saw a “bump in optimism in the second quarter related to the idea that AI would command more investment as well as ultimately result in stronger growth”.
While tech and communications remain the top two performers on the MSCI World Index year to date – up more than 14 per cent each – they are the two worst performers so far this quarter. The two biggest gainers since the end of June have been real estate and utilities.
Here’s a look at the prospects for various sectors:
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Power supply
The surge in the tech industry’s electricity demand is outstripping the available supply in many parts of the world. The International Energy Agency estimates usage by data centres, AI and cryptocurrency may double to more than 1,000 terawatt-hours in 2026 – roughly equivalent to the power consumption of Japan.
That’s put focus on utilities around the world, from Dominion Energy and Southern in the US to South-east Asia’s YTL Power International and Gulf Energy Development.
“We believe that the wide adoption of AI could be a game changer for the power generation industry,” said Evgenia Molotova, a senior investment manager at Pictet Asset Management. “Depending on the rate of adoption, AI can require data centre buildout of two-to-three times the current size of the data centre industry by 2030.”
Equipment
Transformers – equipment that help deliver electricity from the generator to the user – are in such shortage that if you order one today, you will be lucky to receive it in 2028, according to Ken Liu, a China utilities analyst at UBS Group.
That’s boosted shares of top transformer makers this year, including General Electric, France’s Schneider Electric and Japan’s Hitachi.
“Energy infrastructure will be a very big theme, and that was even before artificial intelligence, which only adds to the need for more energy consumption,” said Philipp Baertschi, chief investment officer at Bank J Safra Sarasin. “There will be very good opportunities. Yet one needs to know that these are very cyclical, and there’s a lot of volatility.”
Renewables
The dramatic increase in power usage also raises the spectre of increased pollution, drawing attention to renewable energy shares. Companies involved in solar, hydro, wind and nuclear power have all been mentioned as potential beneficiaries.
China has led the way in terms of the percentage of alternative energy added annually to its national grid, noted Chris Liu, senior portfolio manager at Invesco. While the nation’s 90 per cent share of global solar cell production is caught in the US and Europe’s tariff crosshairs, hydro stocks including China Yangtze Power and Sichuan Chuantou Energy could see investor attention rise.
The AI angle has also put a spotlight on alternative-energy stocks in other regions, from Dutch turbine maker Vestas Wind Systems to South Korean hydrogen-related firm Doosan Fuel Cell.
Copper
Even commodities have an AI trade, with copper a key material in electric cables as well as heat exchangers that help cool data centres. Related stocks include Freeport-McMoRan, BHP Group and China’s Jiangxi Copper.
“Global copper consumption is likely to be two million tonnes higher by 2030, with over half from the US, as power-hungry AI fuels data-centre capacity growth,” said Bloomberg Intelligence analyst Grant Sporre.
Data centres
Data centres are a play on the need for land to host computing facilities that are close to both power sources and major AI customers. Leading real estate investment trusts that specialise in the field include Equinix, Digital Realty Trust and Singapore-based Keppel DC Reit. Shares of Australian property firm Goodman Group have climbed about 35 per cent this year on the AI boost.
South-east Asia is seen as a rising AI hotspot, and local telecommunications firms such as Telekom Malaysia and Advanced Info Service in Thailand are looking to data centres as a new growth engine. Philippine telecom PLDT is seeking a valuation of over US$1 billion for its data centre portfolio as it weighs a partial sale or Reit listing.
End users
Beyond the megacap AI “enablers” and lesser known pick-and-shovel names, some market strategists are focusing on the companies that stand to gain by implementing the technology to improve their businesses.
Morgan Stanley estimates shares of these “adopters” will see an average boost of 27 per cent this year as resulting productivity gains help lift their results. It sees industrials as one of the sectors benefiting the most.
“If you look at the largest market-cap names, it would be companies such as Deere, which is leveraging the information that’s coming off agricultural equipment to optimise farming,” said Katy Huberty, Morgan Stanley’s global director of research. She also highlights Paccar, which designs and manufactures large commercial trucks.
AI’s ability to analyse large, complicated data sets efficiently is also seen as a boon to the healthcare industry, particularly in helping accelerate the drug development process. Scott Schoenhaus, a healthcare technology analyst at KeyBanc Capital Markets, recommends smaller biotech stocks including Recursion Pharmaceuticals and Schrodinger on this idea. BLOOMBERG
