Home / Analysis / Why investors need to prepare for a new wave of AI companies

Markets are looking rosy as the end of the year approaches, but the two extremes aren’t being priced in. Meanwhile, the enthusiasm for generative artificial intelligence risks obfuscating who could really win and lose from the boom.

While markets have been enjoying a Santa Claus rally to close out the year as investors double down on bets that the Fed and its followers are done hiking rates, they aren’t paying close attention to outcomes at either extreme of the spectrum, according to Don Huber, portfolio manager for Franklin Templeton’s Global Growth fund.

”Markets are celebrating that we’re at the highest (point in the rate cycle) or are maybe getting more comfortable with higher for longer,” Huber said. “What they aren’t focusing on is the two extremes. Rates do need to be much higher for much longer but they’re not forecasting that. A better experience would be that if you see the economy really take off, but that’s just feeding into the inflation problem again.“

At the same time, a huge amount of positive investor sentiment is flowing from the boom in generative artificial intelligence, including large language models like ChatGPT, with investors pricing in good prospects for almost any company that manages to incorporate AI buzzwords into their annual results.

“The concept of the Magnificent Seven and the mega cap tech companies that have exposure to generative AI is one of the most interesting things in the market today,” Huber said. “Just the way they’ve taken off this year.”

“We looked at the MSCI World returns and those companies had about a six percentage point contribution to MSCI World this year. Five companies that were specifically focussed on generative AI, as well as Apple. The one we didn’t throw in was Tesla. Looking at the enthusiasm around AI suddenly, it becomes such a buzzword.”

But large, bureaucratic organisations might not be the best place to develop something that is by nature highly iterative, while any highly concentrated sector is one that is ripe for disruption, size be damned; today’s winners might not occupy the same position of primacy tomorrow.

“One of the challenges for Nvidia, and we don’t own it, but other firms are trying to get into chips that compete with Nvidia’s (offering),” Huber says. “It might be one of the big players, but no industry likes having a sole supplier. At some point there’s likely to be a competitor.

“At this point yes these companies have the resources to invest; Microsoft had the resources to invest in OpenAI and has the resources to incorporate that into their search engine; we think there’s going to be changes there. But a more interesting wave is going to be as other, non-tech businesses incorporate it in really interesting ways.”

But the almost unbridled enthusiasm for generative AI – and the fact that you can already use it for fairly nefarious purposes – means it’s not premature for governments to start putting rules around AI, Huber said.

“There’s got to be regulation around that. I think it’s going to be tough to do; the US is coming out ahead with the recent blueprint for regulation, but I do think that’s important. You already have uses where singers have had their voices duplicated, singing another song. You could have an author speak a handful of words and then put out an audiobook in their voice.”