Our recent US trip offered valuable perspectives on how the AI boom is reshaping investment approaches, amid ongoing uncertainty around trade and tariffs.
Interviews with US managers
Watch the interview with David Siino, TD Epoch:
Watch the interview with Scott Berg, T. Rowe Price:
How top global managers are positioning for the AI era
At the end of 2022, ChatGPT was made available to the public. This was a watershed moment that would lead to Artificial Intelligence (AI) now being front of mind for many investors. The consensus among fund managers is clear – AI represents a tidal wave that will fundamentally reshape every aspect of our lives. Parallels are being drawn between AI and the internet, with managers recognising the transformative potential of this new technology but also worrying about where the risks may lie.
The internet truly took off in the late 1990s, with equity markets peaking in early 2000 as investors became overexcited about its universal benefits. However, the subsequent Dot-com crash was a realisation that as with any new technology, there will be winners and losers. A case in point is Amazon.com, which today is one of the largest companies in the world, while Pets.com unfortunately didn’t make it.
The obvious beneficiaries: Picks and shovels
Fund managers widely acknowledged that some of the immediate beneficiaries of the AI boom are companies involved in providing the "picks and shovels", an apt reference to the Gold Rush era. These are companies such as Nvidia, Taiwan Semiconductor Manufacturing Company and ASML, which are involved in the design and manufacturing of advanced computer chips required to run AI processes. These companies form the foundational infrastructure upon which the AI revolution is built.
However, managers are looking beyond these obvious plays. As one manager noted, "As AI starts affecting everything, we're starting to think about what this means for companies within sectors such as industrials, utilities, consumer staples and healthcare." This broader perspective is driving portfolio diversification into unexpected sectors that stand to benefit from AI's transformative impact.
Utilities: From boring to essential
Perhaps no sector exemplifies this shift more dramatically than Utilities, traditionally regarded as one of the market's most mundane sectors. The United States is experiencing a foundational change in power demand that represents a complete departure from the past two decades. For twenty years, electricity growth remained stagnant despite economic expansion, as efficiency improvements – such as the switch from incandescent to LED lighting, buildings switching their lights off automatically, and more efficient air conditioning – offset increased demand.
Today, things are very different. We’re at a juncture where energy efficiency gains have largely been realised, just as AI power demand explodes. Due to the enormous energy requirements of data centres, there has been a significant increase in the demand for power. Forward-thinking managers are capitalising on this shift by investing in electrical utility companies, with particular interest in those with nuclear assets (like Constellation Energy, which recently signed a 20-year agreement to supply Meta with carbon-free power for its data centres).
The utilities sector's transformation extends beyond traditional power generation. Many utility companies are actively investing in and partnering with small modular reactor (SMR) developers, driven by the need for reliable, clean, and scalable energy sources. This trend addresses growing electricity demand from data centres, while replacing retiring fossil fuel plants. SMRs are expected to begin coming online between 2030 and 2035, positioning utility investments as long-term AI beneficiaries.
Unexpected winners: Real Estate and data-rich companies
The AI revolution is creating opportunities in the most unlikely places. Consider Welltower, a real estate company operating in senior housing – an industry known for using minimal data in unsophisticated ways. By embracing AI, this company has placed itself on a very different trajectory to some of its peers. For example, it has used AI to improve operational efficiency by shortening lead response times and converting more enquiries into residents. It has also been used to make better investment decisions regarding site selection. This illustrates how AI's impact extends far beyond technology companies into traditional industries.
The current political landscape is also influencing how managers are thinking about portfolio positioning. While small caps were perhaps the biggest beneficiaries during Trump 1.0, managers believe large caps may present better opportunities under Trump 2.0. This shift isn't solely due to large caps' offshore operations and pressure to onshore some of these activities. More importantly, companies poised to benefit the most from AI are those with large quantities of unique data – typically the biggest companies.
Consumer giants like Procter & Gamble and Coca-Cola possess vastly more data than smaller consumer companies, while healthcare behemoths like Eli Lilly and UnitedHealthcare dwarf smaller healthcare firms in data assets. This data advantage becomes a competitive moat in an AI-driven world, making some large-cap companies attractive long-term investments.
Balanced approach and bubble navigation
Despite AI's obvious potential, many managers express caution about a bubble potentially forming around this theme. The key lies in maintaining investment discipline, while capitalising on transformative opportunities. Given all the hype around AI, there’s a temptation to over allocate to the obvious beneficiaries. A more prudent approach is to maintain balance – in other words, don’t forget that there are opportunities within the technology sector outside of AI, such as in cybersecurity, enterprise software and e-commerce.
One of the managers we spoke to summed it up nicely – successful navigation of the AI cycle requires a strong investment framework focusing on four key elements: linchpin technologies that are mission-critical to customer success; companies innovating in secular growth markets; businesses with improving fundamentals including accelerating revenue or expanding margins; and reasonable valuations that don't reflect excessive speculation.
Future outlook and cautious optimism
The recent US earnings season confirmed that AI spending plans remain robust, with utilisation ramping up aggressively across major technology companies. Near-term demand appears healthy, but there is some uncertainty as to what that may look like in 2026 and 2027. The enormous compute capacity being created today raises questions about whether demand will match supply over this timeframe. This uncertainty has led some managers to reduce their exposure to the hyperscalers (i.e. Alphabet, Amazon, Meta and Microsoft), anticipating that spending growth may plateau. The message we heard was that the AI theme may no longer be the "no-brainer" it appeared to be a year ago. Investors will need to be more selective going forward.
Fund managers are preparing for a multi-year transformation that will create tremendous opportunities, but also expose companies to new and complex risks. Successfully navigating this new paradigm will depend on identifying sustainable competitive advantages, maintaining investment discipline, and recognising that while AI may indeed transform everything, not every AI-related investment will prove profitable.
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