The AI evolution: where are we heading?

There has been an increase in stories and articles about Artificial Intelligence (AI) this year. Excitement about the potential capabilities of generative AI applications has also sparked a rally in technology stocks. Jeffrey Lin and Thomas Lee, Fund Managers, Global Artificial Intelligence (Thematic Technology), explain why they believe that generative AI is a significant technological advancement that could transform multiple industries and, importantly, translate into exciting new investment opportunities.

2023 could be billed as the year that AI went mainstream. Over the past few years, AI has become increasingly prevalent in everyday life, used in voice assistants such as Amazon’s Alexa and Apple’s Siri; customer service chatbots; personalised online recommendations for shopping or viewing choices, and much more. But this year, there’s been an explosion of interest in AI and its capabilities, thanks largely to ChatGPT. 

The rise of ChatGPT

The large-language model (LLM) chatbot, ChatGPT, created by Open AI, was made freely available in November 2022. It quickly became one of the fastest-growing applications ever, reaching 100 million users in just two months¹. LLMs are advanced AI programs trained on large amounts of text data to understand human language and produce meaningful, natural responses for its users. The technology is designed to make communication between humans and computers more like human-to-human conversations. 

ChatGPT sparked a wave of excitement in the AI sphere because it enabled anyone with access to the internet to experience generative AI’s enormous potential. In its response to simple prompts and questions, it’s been a powerful demonstration of how generative AI can enable computers to ‘think more like humans’ and create original text, images, video, music and computer code. 

A disruptive technology 

We believe AI is now entering the next phase of its evolution, driven by generative AI and LLMs. In our view, the capabilities and applications that AI now offers has huge potential to transform businesses, disrupt entire industries, and even alter our lives. 

We believe a broad range of industries have the potential to be transformed by AI. Using computers to enhance human decision-making and perform repetitive tasks could help businesses improve efficiency and productivity. For instance, to improve crop yields in the agricultural industry, self-driving tractors are using image recognition to identify weeds and spray herbicides on unwanted plants. 

In healthcare, drug discovery is an area where generative AI could be extremely beneficial. Companies are seeing significant increases in the speed and efficiency of drug development, thanks to AI’s ability to analyse enormous datasets and recognise patterns. 

Pharmaceutical companies have the potential to make new medical discoveries and healthcare advancements that were previously unimaginable. Increasingly, utility companies are embracing AI to help improve electricity infrastructure, by enabling the development of ‘smart grids’ to help optimise electricity distribution and consumption. 

In the financial services industry, McKinsey suggests that banking is one of the industries that could see the greatest value from the technology, particularly in the areas of risk assessment and fraud detection. The provision of services such as client reporting, customer service and back-office operations could also become significantly more efficient with the use of generative AI. 

Combining AI and human intelligence 

The use of technology in the investment industry has grown exponentially over the past decade, in line with the rapid growth and evolution of data. And at M&G, we’re embracing the technology, and developing bespoke AI solutions.

The changing regulatory backdrop means that we’ve seen an explosion in the volume of data related to our own operations and investments, whether it is Diversity and Inclusion (D&I) and climate data on our operations, or broader Environmental, Social and Governance (ESG) data on our investments. 

Asset managers have been realigning resources to comply with new regulations and disclosure requirements – both at a corporate and a product level – acquiring and analysing data and feeding this information into company-level and investment management systems and processes. 

At M&G we’re active managers, which means we’re ‘hands-on’ in terms of our expertise in managing your investments, and the human element in the investment process will always be critical to our success. However, technology plays a pivotal role in helping us create innovative solutions and also scale up existing processes for greater efficiency. In essence, technology exists to serve a particular purpose – helping us translate data into actionable insights, more efficiently. 

In our machine learning-based investment strategy, we employ AI with human oversight. We’ve developed algorithms which form the core recommendation engine, and we overlay its conclusions with oversight from our fundamental equity (shares) team. The aim is to leverage the best of human and machine intelligence in the stock selection process. And in the same way as human knowledge grows, also the data size and computational power have increased over time – just more exponentially. 

Spectrum of AI opportunities 

We believe natural language processing (NLP), whereby computers learn to understand and interpret human language, is just emerging as a powerful force in the global economy and the use cases will increase in line with improvements in processing power. 

In our view, AI is a multi-year investment theme that has the potential to become a mainstream technology in the real economy. When we assess the spectrum of AI-related investment opportunities, we see three distinct categories: enablers, providers and beneficiaries.

AI enablers

Generative AI relies on a large amount of computational power, both to ‘train’ the LLMs and to recognise patterns in the datasets, then to run the application and generate the responses. 

Enablers are the companies that supply the key technology underlying AI advancements, such as computational power, data, high speed data communications, and sensors. These include semiconductor firms that produce the processors and chips used to perform high-speed data processing; systems companies that supply networking equipment; and telecoms firms providing bandwidth to the network edge from the data centre and vice versa. 

In our view, Nvidia is the most prominent enabler. The company provides most of the processors used to build neural networks for AI models – this helps explain why Nvidia’s share price has soared more than 200% in 2023, pushing its market capitalisation over $1tn². 

Arguably, AI would not be at the scale it is today without Nvidia – in the past 10 years, the company has increased AI performance by a million-fold. The company has a long-term vision and is constantly looking for new AI applications for its technology. In our view, the technology will only get better, driving further demand for Nvidia’s processors. As long as the company can continue to provide more capabilities, we expect Nvidia to continue growing at a rapid rate.

AI providers 

Another potential source of investment opportunities is the providers of AI services and products to end users. These companies typically, but not exclusively, belong to the software industry, which are enhancing their products with AI. 

A notable provider, in our view, is Microsoft. The technology firm is a significant investor in OpenAI and is rapidly supplementing its software products with AI features such as Microsoft 365 Copilot. With a dominant market share in office productivity software, Microsoft has the opportunity to increase the power of its software and charge more for AI-integrated products. Other examples include human resources solutions firm Workday and creative software provider Adobe. 

AI beneficiaries 

Our third category is AI beneficiaries – firms that are increasing efficiencies by using AI in their operations. These are typically found outside the IT sector and range from consumer to healthcare to automotive and industrial businesses. 

US food and beverage firm PepsiCo is, in our view, a good example. The company is using AI in multiple areas to help grow its business, as well as improve operational efficiency. In manufacturing, PepsiCo is employing AI to maintain food standards. The company is also using AI in product development, to gauge the potential success of new products; and to optimise sales, it uses AI to determine shelf locations for its products. 

Over time, we anticipate that AI will be adopted by more and more companies, in every sector, as they seek to become more efficient and improve productivity. As AI becomes more pervasive within the real economy, we would expect to see greater investment opportunities among the AI beneficiaries category in the future. 

Thriving and surviving 

We have highlighted just a few examples of the impact that generative AI could have on different sectors. There are plenty of other cases, such as in education, manufacturing, and autonomous vehicles, and there will undoubtedly be many more as the technology continues to develop at pace. 

Over the coming years, we believe that generative AI and its applications have the potential to be long-term growth drivers, boosting productivity in a range of tasks and transforming industries. We think this is an exciting time for innovation and competition – these are early days for the new technology, and it will be fascinating to see how it develops, how firms harness it successfully, as well as observing the regulatory and security developments. 

As ever, a new disruptive market force will create winners and losers. We see plenty of attractive AI-related investment opportunities, but some companies may find themselves not being able to keep up with more AI-savvy competitors or may end up seeing the markets they operate in fall victim to AI’s many applications. On a multi-year basis, we believe that the implementation of AI, and generative AI in particular, will be but one determinant of those winners and losers.

The views expressed in this article should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

¹ Reuters, ‘ChatGPT sets record for fastest-growing user base – analyst note’, Reuters. com, February 2023.
² Financial Times, ‘Enthusiastic Nvidia investors may need a reality check’, ft.com, July 2023.