Investors should think beyond tech to access AI investment momentum | Mint

Investors should think beyond tech to access AI investment momentum

An attendee walks past a General Robot poster at the World AI Conference (WAIC) in Shanghai, China. (Photo: Bloomberg)
An attendee walks past a General Robot poster at the World AI Conference (WAIC) in Shanghai, China. (Photo: Bloomberg)

Summary

Investors looking to buy into momentum around artificial intelligence should consider stocks outside of the technology sector, said Ron Temple, chief market strategist at financial advisory and asset-management firm Lazard.

SYDNEY—Investors looking to buy into momentum around artificial intelligence should consider stocks outside of the technology sector.

That is the view of Ron Temple, chief market strategist at financial advisory and asset-management firm Lazard. Temple thinks that the most attractive opportunity over the next two to three years is in U.S. large-cap stocks that profit from AI by improving the quality of their services, rather than developers of the technology itself.

“I do think…generative AI and machine intelligence is going to be revolutionary, and there’s going to be money to be made there," Temple said in an interview.

The challenge for investors is that the share prices of AI developers already look full and “you need to see a pretty rampant demand to justify some of the valuations of those big tech stocks," he said.

In the U.S., shares of big tech companies are surging this year, driven by investor optimism about the promise of AI. That is a reversal from last year, when value stocks pulled ahead of growth stocks for the first time since 2016.

“I think that’s the opportunity in large caps now is looking beyond the obvious winners from AI and thinking about the companies that can deploy AI to basically improve their profitability, gain market share," Temple said.

He cited the potential for AI to benefit fast-food chains. Whereas customers using drive-through lanes to order their burgers or french fries currently talk to staff, this interaction could be replaced by machine-learning technology in future, Temple said. That would save restaurant operators on wages.

In addition to opportunities in AI, Lazard is bullish about U.S. small-cap stocks as the Federal Reserve pivots toward potentially cutting rates next year. Valuations of small-caps were hit harder than those of large caps when rates rose, but Temple thinks this could soon reverse.

“If the Fed is now shifting the other direction, that could be a real lift for earnings in 2024 and 2025," Temple said.

Approximately 40% of the small-cap equities listed on the Russell 2000 Index were loss-making over the past 12 months. Temple said this indicated that small-caps were more highly leveraged than constituents of the S&P 500 index, and therefore exposed to punishing increases in their debt costs when rates rose. That pressure on their balance sheets could ease when the Fed begins cutting rates.

Even so, a focus on quality among small-cap stocks would still be needed.

“Don’t just go out and buy the index," Temple said. “You might want to own a good chunk of the index, but you might really want to be selective where you engage."

Among small-caps, Lazard isn’t keen on the biotechnology sector, as nearly 90% of biotech stocks on the Russell 2000 Index have historically been loss-making. He also thinks that small banks lack appeal.

“In the U.S., in particular, a lot of those small-cap banks have disproportionate exposure to commercial real estate," he said.

Write to Alice Uribe at alice.uribe@wsj.com

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