Swiss UBS Global Wealth Management chief investment office shines a spotlight on 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 chief investment office (CIO)
believes that AI is the tech theme of the decade.
The monthly realised volatility for the 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 geopolitical
uncertainty and the risks of export controls, the firm expects
increased volatility for technology stocks in the near term.
However, UBS WM is constructive on the broader tech sector as
well as AI, and believes that volatility should be used to build
long-term AI exposure.
While their investment case for AI in public markets remains
intact, UBS WM also thinks that there are interesting
diversification opportunities in private markets due to
broadening AI adoption and spending trends. In particular, it
sees broad-based private AI opportunities in venture capital
(VC), private equity (PE), and real assets (RA), with a focus on
large language models, software applications, and data centres.
UBS highlighted how in 2022 the launch of ChatGPT 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 for the smart device industry, unveiled in
January 2007. 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 its view that AI is still in its early days, with more
signs of broadening demand and spending trends, UBS sees
investment opportunities ahead.
“The AI trend is a prime example, where private markets, and
venture capital in particular, offer investors a unique
opportunity to capitalise 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 centres, 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
stabilisation. 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 favour 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 centres.”