How will the AI hype impact European equities?

How do you navigate investing amid the AI hype cycle?

Right now, and it will continue, there’s a lot of noise and hype, some of it justified and, as ever with noise and hype, a lot of it unjustified, around artificial intelligence (AI). And I think the obvious question, one particular segment of the market, is an obvious area to address in that context, and that’s the semiconductors.

What I would say is not all semiconductor stocks are born equal. There are semiconductor chip manufacturers who will be exposed to all sorts of other cycles and industries, not just AI. Some of them won’t be exposed to AI at all. So once again, you have to differentiate.

And an area that we do like, and we’re not alone, because a lot of people like them, a lot of investors like them, and this is very long term and does feed into the AI megatrend is semiconductor equipment manufacturers.

Your ASML, your Besi, your ASMI are equipment businesses, and I think within some of those you will get exposure to this megatrend, to AI, but not all semiconductor chip manufacturers will bring you exposure to that.

In terms of the cycle, now within every secular trend there’s always a cycle, and I’ve seen it so many times over the decades. There are a couple of things that I would caution against with secular themes.

I can believe in the secular themes, and I do believe in AI, but a secular theme will have a series of cycles therein. So, beware the cycle. Beware extrapolating too much. And of course the other one is this, the second thing is this: in the early days and stages, the gold rush stage of a megatrend, an investment theme, [there is a] hell of a lot of money to be raised and invested and spent and burnt. And that will happen, of course it will happen, again.

And you will get a mixture of some startups who will make it and many who won’t, and a number of incumbent tech companies that, today, might look a bit mature, will actually be winners from said megatrend. That’s been the case through history, on all megatrends, and it’ll be the case with this one.

What investment opportunities are there in AI for European equities investors?

I tend not to get caught up in the herd of excitement of “where can I splurge money in the moon-shot phase of the next AI winner.” I never got involved in that when it was the dotcom boom-bust. I tend to look at where could the mistakes be made, where is there money to be lost. Because so much of investing is actually not allocating capital to the wrong things, if you know what I mean.

So as that applies to AI, what I’m really getting at is who and what, or whom and what, will it disrupt? Who’s in the crosshairs of disruption? I’m always looking for the victims as well as the winners in a situation.

And if you’re invested in, you might say, industrial companies, you feel a wee bit more comfortable than you might in areas of the service economy, for example it could be content producers. Highly rated content producers, be that technological publications or science publications or that sort of thing, legal databases and publications, money management. So in the service arena, I can see disruption, and perhaps some dinosaurs in the making. Avoid the dinosaurs in the making.

How do you disrupt? I’m not in steel, but how do you disrupt steel manufacturing via AI? How do you disrupt building materials via AI? How do you disrupt mining materials, mining supply equipment companies? Dear old old-economy businesses that we like.

And I think they’re not in the crosshairs. I would be worried about those in the crosshairs. We’re spending a lot of time as a team saying, who’s next? Could it be the music industry, could it be this, could it be that? Content owners, many of them are going to be very vulnerable.