2023’s AI boom was about ‘obvious’ plays — here’s how to invest in the next leg, according to Citi
Artificial intelligence blew up the markets in 2023. And Nvidia marked the heart of the AI boom, soaring over 200% last year. The “Magnificent Seven” tech stocks drove much of the gains of the S & P 500, which rallied about 24% after a dismal 2022. “The most obvious beneficiaries of the generative AI revolution have already seen an expanded growth in their market cap in 2023, but there are potential opportunities as we enter the next stages of the buildout,” Citi said in a 2024 wealth outlook report it recently launched. The bank said it’s “most certainly, not too late” for investors to participate in the “exponential growth” of AI technology. “Last year was about the obvious ones. Big companies, large free cash flow generation can fund the innovation, the infrastructure – kind of true technology plays,” said Kristen Bitterly, head of investment solutions at Citi Global Wealth. “I think what will happen this year and beyond is AI stands to benefit a lot of industries.” She cited the energy transition as an example. “Another thing that people don’t think about is investing in the energy transition. AI consumes a lot of energy, so the need to make sure that energy consumption is as efficient as possible,” said Bitterly, who was speaking at a Singapore briefing on the report. Bitterly added that there’s been a “big valuation disconnect” in terms of the big winners from 2023 and the other beneficiaries of the AI trend. Here are four areas that are “clear beneficiaries from the coming integration of AI into everyday business and personal lives,” according to Citi. AI infrastructure Key suppliers along the global semiconductor value chain are set to be big beneficiaries in 2024, Citi said. That will include chipmakers, semiconductor equipment and data centers. The rise of generative AI has led to demand shifting from chips for general-purpose computing to high-performance chips, the bank noted. Semiconductor equipment companies and fab facilities with the capacity and know-how to produce cutting-edge chips hold “near-monopoly positions,” said Citi, which named Dutch company ASML as the sole provider of the lithography equipment needed to imprint microchips. “Alternatives to this equipment and manufacturing know-how are hard to come by and there are significant barriers for potential new entrants,” the bank said. “As the semi cycle turns upward in 2024, we see an opportunity for semiconductor manufacturer and equipment shares to catch up to the GPU design firms that led the market last year.” Drug discovery Drug design and discovery is one area likely to benefit from “significant AI disruption,” said Citi. The bank described how scientists discover drugs as “often a game of trial and error.” “The world’s most highly sophisticated scientists pool their collective expertise and effectively make educated guesses on how certain combinations of proteins may affect the human body. Those tests then go through clinical trials, which can take over a decade to complete even before FDA review,” the bank said. After all this, 92% of those candidate drugs fail, according to Citi Research. However, AI will be able to “dramatically reduce” the failure rate of such clinical trials, it said. A higher success rate will have a “dramatic effect” on drugmakers’ profitability, as well as the cost of drugs. Robotics and automation The underlying tech used in generative AI — Citi referred to it as “neural networks” — is also the engine that will power more human-like robots and other forms of automation. “When combined with long-term trends of evolving supply chains and automobile technology, we see the stars aligning for investment in this space,” the bank wrote. The continuing manufacturing and e-commerce boom will lead to the need for more automation and robotics, according to Citi. A boom in U.S. manufacturing construction took place last year as the country shifted production closer to home, and the buildout of warehouse capacity to support ever-growing e-commerce will continue, it said. “While manufacturing square footage is rising, we doubt that every overseas factory job will be replaced one-for-one with American workers in an already tight labor market,” Citi said. “More likely, firms will continue to invest in automation and robotics to move packages and operate assembly lines.” Cybersecurity Citi warned of a sinister side to the proliferation of AI: hackers using AI chatbots to write the code to carry out cyberattacks. On the flip side, AI can be used to improve the detection and prevention of such cyberthreats, the bank said.
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