UBS Global Wealth Management”s chief investment office shines a spotlight on the investment opportunities for artificial intelligence in private markets through venture capital, private equity, and real assets.
Although October has historically been the most volatile month
for tech stocks UBS
Global Wealth Management‘s chief investment office (CIO)
believes that AI is the tech theme of the decade.
The monthly realized volatility for Nasdaq 100 over the past 40
years has been 26 per cent in October, compared with an
average of 22 per cent in other months. Given ongoing
geopolitical uncertainty and the risks around export controls,
the firm expects increased volatility for technology stocks in
the near term. However, the Swiss firm is constructive on the
broader tech sector as well as the AI story, believing that
volatility should be utilized to build long-term AI exposure.
While their investment case for AI in public markets remains
intact, UBS WM also thinks there are interesting diversification
opportunities through private markets due to broadening AI
adoption and spending trends. In particular, it sees broad-based
private AI opportunities in venture capital, private equity, and
real assets, with a focus on large language models, software
applications, and data centers.
UBS highlighted how the launch of ChatGPT in 2022 proved to be an
inflection point for the adoption of AI, much like the Netscape
browser was for the internet (launched 30 years ago in October
1994), or the iPhone (unveiled in January 2007) for the smart
device industry. These events have resulted in an explosion of
investor wealth. The market cap for the publicly-listed
tech-heavy Nasdaq index continues to soar while private markets
have witnessed exponential growth in tech unicorns and funding,
the Swiss wealth manager added.
Given their view that the AI theme is still in its early days
with more signs of broadening demand and spending trends, they
see investment opportunities ahead.
“The AI trend is a prime example, where private markets, and
venture capital in particular, offer investors a unique
opportunity to capitalize on long-term disruptive innovation,
which complements public markets as some companies choose to stay
private for longer,” Laeticia Friedemann, alternative investment
strategist at UBS Global Wealth Management, said.
“With broadening AI trends, diversified exposure through both
public and private markets is how investors should best play and
gain long-term exposure to this structural AI trend,” Sundeep
Gantori, equity strategist at UBS Global Wealth Management,
added.
In public markets, UBS’s AI portfolio gives exposure to publicly
listed AI companies that offer strong scale, margin, balance
sheets, and execution advantages. At the other end of the
spectrum, companies in venture capital and private equity provide
access to breakthrough innovation and strong long-term potential,
while digital infrastructure offers an opportunity to invest in
more stable assets that provide the building blocks for the AI
revolution, the firm said.
“While venture capital firms invest in innovative – but often
unprofitable – startups that are at the forefront of AI
intelligence and development, private equity managers tend to
invest in mature companies with proven applications and
established revenues,” the Swiss wealth manager continued. “Real
asset funds – be it infrastructure or real estate – focus on the
underlying technologies and systems that enable AI development,
such as data centers, cloud computing, telecommunications, but
also electricity generation,” the firm added.
Although private market activity has slowed down since the
interest rate hike cycle initiated by major central banks in the
first half of 2022, data for the first half of 2024 points to a
stabilization. The beginning of the US Federal Reserve interest
rate-cutting cycle should solidify the recovery, in their view.
Wrapping up, Mark Haefele, chief Investment officer at UBS Global
Wealth Management, said: “We continue to favor the semiconductor
space and megacaps for AI exposure, and recommend investors
consider structured strategies or a buy-the-dip approach for
quality AI stocks. For investors willing and able to manage risks
such as illiquidity, we see broad-based AI opportunities in
private markets with a focus on large language models, software
applications, and data centers.”