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Artificial intelligence (AI) is not just a fad term or trend but a structural shift in society and is impacting global equity markets in three main ways, according to Global X ETFs.
Investment strategist Billy Leung is new to Global X but has extensive expertise in tech companies and trends.
Leung has been monitoring tech stocks since the early 2000s through roles as a sell-side analyst and in high-frequency trading.
“Investors need to appreciate there are three big things happening in global markets right now as AI continues to develop and gain traction,” Leung told Stockhead.
Leung says one data point he always gives investors and clients is that chip computing rates have increased about 10 times in the past 10 years.
“Meanwhile, the costs of chips have gone down about 16 times,” he says.
“More powerful and affordable chips is one of the key reasons why there has been such a strong improvement in developing AI in the past decade.”
Leung says investors are still underestimating the companies involved in AI including the so-called Magnificent 7 — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
He says the fallout from the dot.com bubble more than 20 years ago continues to linger.
“There’s still a lot of bad taste and people still think tech companies are very reckless and bad financially,” he says.
“But when you really dig into the tech companies right now over 80% of the Nasdaq 100 companies are profitable.”
Recent research by Leung found the Nasdaq 100 were actually more financially strong than the S&P 100.
Leung says investors know the likes of the Magnificent 7 and chip-maker Nvidia, which has become a bellwether for AI stocks.
Nvidia’s shared rose 239% in 2023 and is up more than 96% YTD. With a market cap of ~US$2.33t Nvidia has grown to become one of the world’s biggest companies.
However, beyond Nvidia Leung says there needs to be an appreciation of how deep AI goes.
“If you look at the hardware driving artificial intelligence for example Nvidia that is only one small part of the story,” he says.
“There are companies which make different types of chips like maybe memory chips, and these can go from Korean to maybe US names such as Micron.
“There’s also companies making different types of equipment that manufacture these types of chips.”
He says if you look at the semiconductor production equipment space there are 15 sub-segments that are all driven by AI demand.
“Each of these is becoming very popular,” he says.
“Ten to 15 years ago, the semiconductor space was primarily reserved for industry specialists and a small group of specialised investors.
“However, AI has accelerated growth, driving new developments and attracting broader market interest.”
Leung says we haven’t yet seen the potential of AI in terms of creating new products and services.
“The analogy I always use is if there was no Intel, no chip, no HP, no PC then there would be no Microsoft,” he says.
Leung says looking back at the PC or internet era, these huge paradigm shifts don’t go away but the focus will shift in line with different types of development.
“AI is going to be around but what we hear about and the headlines are going to be constantly shifting with the overarching theme always being artificial intelligence,” Leung says.
“I think over the next two to three years we will see the semiconductor space really showing itself.
“No one gives enough weight on how much semiconductors do for AI and there’s a big pocket of semiconductor space.”
Leung says when investing during times of great technological change like with AI it’s good to get exposure to the three segments that will drive innovative change.
“During PC we saw Intel creating great chips, so these are the companies making hardware allowing advancement in development,” Leung says.
“We’ve seen Nvidia be strong with chips but there’s a long list of hardware companies such as SK Hynix, which makes memory chips and Qualcomm making specialised chips for laptops for example.”
“Enablers build the platform for the technology to actually expand on, so that was HP building the PC during the Microsoft era,” Leung says.
“In the infrastructure or enabler side we also have cloud and data management companies like Oracle, Cisco, even IBM.”
“These are the companies leveraging the chips or platform and building the incredible new service or product like Microsoft,” Leung says.
“There are some household names like Meta or Netflix but there are also lesser-known names such as ServiceNow and Salesforce who are applying AI to increase their margins and services.
“If you look at the margins in the last quarter for all these tech companies it’s the margins that have been driving this new scalability for companies.”
Leung says investors should work to gain exposure to hardware, enabler and adopter side of artificial intelligence, for which ETFs can often provide.
“You need to buy a basket of names,” he says.
Leung says the Global X Artificial Intelligence ETF (ASX:GXAI) is composed of two strong segments of companies.
He says the selection criteria for GXAI is companies which apply AI to their services or are developing AI, or are developing hardware supporting AI infrastructure.
“This ETF is exactly what we have been discussing and tries to capture that breadth and depth of artificial intelligence.”
The ETF provider also offers exposure to the AI space through the Global X Semiconductor ETF (ASX:SEMI) and Global X Fang+ ETF (ASX:FANG)
Betashares says its main ET offering exposure to AI is the BetaShares Global Robotics and Artificial Intelligence ETF (ASX:RBTZ).
A spokesperson for ETF provider VanEck says its two biggest ETFs, the VanEck MSCI International Quality ETF (ASX:QUAL) and VanEck Morningstar Wide Moat ETF (ASX:MOAT), offer exposure to AI.
QUAL includes Nvidia, Microsoft, Alphabet, Meta, Adobe, ASML, Texas Instruments, Broadcom, Qualcomm and Cisco.
MOAT includes Alphabet, Amazon, Microsoft, Salesforce and Adobe.
The spokesperson says the VanEck MSCI International Value ETF (ASX:VLUE) offers exposure to Cisco, Intel, IBM and Qualcomm.
The VanEck MSCI Multifactor Emerging Markets Equity ETF (ASX:EMKT) offers exposure to Taiwan Semiconductor Manufacturing Co (TSMC), Samsung, Advanced Micro Devices (AMD) and Alibaba.
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