Artificial intelligence will assist stock pickers, not replace them

Far from making stock pickers and financial advisors obsolete, generative artificial intelligence (AI) will be a boon to the wealth management industry, says Jennifer Martin, vice-president and global equities portfolio specialist at T. Rowe Price.

Martin said AI will be able to tackle time-consuming tasks like building investment models, reading financial statements, summarizing earnings calls, and looking for patterns that reveal alpha-generating opportunities.

“There is the potential for AI to allow us to become even better at our jobs,” she said. “AI is going to be an augmentation tool, not a replacement tool.”

She likened the buzz about AI to previous technological breakthroughs like the internet build-out of the late-1990s and the smartphone revolution of the late 2000s.

“Now, we’re excited by another new technology,” she said. “It’s our job to responsibly navigate this euphoria, and really evaluate individual companies that are direct beneficiaries.”

Among the most obvious names set to cash in, she said, are the tech giants that design and create the most powerful semiconductor chips on the market: Netherlands-based ASML Holding, Taiwan-based TSMC Ltd., South Korea-based Samsung Electronics Company Ltd., and California-based AMD Inc., Synopsys and Apple Inc.

“Right now, the companies to watch are the ones that are most directly building the infrastructure for AI,” she said.

Further down the food chain are the major companies that use those chips — Washington-based Amazon, and California-based Microsoft Corp., Nvidia Corp., ServiceNow Inc. and Adobe Inc. — to generate a better user experience or higher productivity.

The challenge for investors, she added, will be maintaining the enthusiasm and imagination that AI fosters, while staying vigilant about company fundamentals and sector trends.

“Active management might be required to navigate all of the change and disruption brought on by AI,” she said.

Martin said she expects most tech stocks to have accelerating organic revenue growth and operating margin expansion through the first half of 2024. Furthermore, she pointed out that the global technology universe is trading well below peak valuations. The IXN Global Tech ETF, for example, is currently trading below its historical peak valuation.

“It’s definitely reflecting some appreciation, but we’re not at extremes,” she said. “So, when you pull all these different elements together — addressable market, where we are on fundamentals, and valuation — this does point us to a positive outlook on the technology sector from here.”

There will be a lot of companies in the “grey area” where performance in an AI-dominant world is uncertain. Surprisingly, California-based Alphabet Inc. could be one of them, she said. Despite seeming to have all the resources to be a winner — data, talent, applications and customers — investors may question whether AI will fundamentally disrupt its core business model.

“The Google business model is predicated on traditional search. AI search is just different. So, will that business model be sound?” she said. “It’s easy just to say this is a winner and this is a loser. But it’s the grey area where maybe you can skate out onto the ice and test to see, maybe something is changing or maybe something is not as absolute.”

She cited Adobe as an example of a company that could be inoculated against disruption because its suite of software could be enhanced and simplified through AI.

“We’re incredibly constructive on the stock because the company is using its massive customer base to distribute generative AI through their creative tools,” she said. “And we think this generative AI will lead to user expansion because it will expand the demand for their creative tools, and it will also allow, maybe, easier use and higher utilization of those creative tools.”

One of the most compelling opportunities in AI relates to data — reposited in what are known as data lakes — that can be analyzed to generate insights and revenue possibilities. A company she favours on this front is California-based Databricks, which allows Fortune 500 companies to run large language models on their data lakes.

“We’ve been sharing with a lot of our clients for decades now that data is a strategic asset,” she said. “Generative AI will help create and scale data [in a way] that is better usable for the end customer. And customers will pay for that.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.