The adoption of generative artificial intelligence has gained momentum, causing the markets to thrive. Despite this, investors are becoming increasingly aware of potential risks associated with the technology. As a result, IT services, consulting, media, information, and education businesses are being scrutinized by portfolio managers to evaluate AI’s potential for disruption. While generative AI has the potential to add $7.3 trillion to the world economy annually and half of today’s work activities could be automated between 2030 and 2060, there are also risks involved.
Analysts warn that there may be losers across Europe and the United States, in addition to obvious winners such as Nvidia in the chip sector. Corporates face significant challenges, including redundancies and rethinking their business models if they want to fully realize AI’s potential. Gilles Guibout, who heads European equities at AXA Investment Managers in Paris, says that AI could have a deflationary effect, leading to price cuts, lower sales growth, and share price underperformance.
In some cases, companies that face strong competition or where growth depends on headcount may experience a decline in market share due to staff-light newcomers. For example, in the IT services sector, customers may demand lower prices if fewer people are required for coding. Bank of America’s survey in June showed that 29% of global investors do not expect AI to increase profits or jobs, compared to 40% who do.
The Dark Side of AI
Concerns about AI have already manifested across markets, with companies like French outsourcing firm Teleperformance and US-based Taskus, which manage call centers and other services, seeing a decline in share prices of around 30% this year. In education, UK’s Pearson slumped by 15% in May after US peer Chegg, down 62% this year, said that significant student interest for the Microsoft-backed ChatGPT bot was hitting customer growth.
Despite valuations looking attractive, uncertainty over AI has deterred some investors, such as Andrea Scauri, portfolio manager at Lemanik, from investing in some IT services stocks. On the other hand, larger players like Accenture are seen as better equipped to navigate the transition and deploy necessary capex. Accenture recently unveiled a $3 billion investment plan to power its AI efforts, three months after announcing 19,000 layoffs, or about 2.5% of its workforce. Its shares have risen 19% this year, and French peer Capgemini is up 13%. Companies such as Relx, which handle regulated information, are also seen as less exposed to potential AI headwinds.
Cristina Matti, small and midcaps portfolio manager at Amundi, said that indiscriminate investing is not an option for investors seeking AI exposure. Instead, it’s important to do your research. While some analysts say that price falls have been excessive in certain cases, exaggerating concerns over earnings growth, others remain cautious, saying that the fast adoption of cheaper AI-powered offerings could slow growth as soon as order backlogs of more conventional services are fulfilled.
Generative AI has the potential to revolutionize the world economy, but investors need to be selective in their stock-picking to avoid the risks involved. While larger players like Accenture are seen as better equipped to navigate the transition, companies in sectors like call centers and education are vulnerable to the effects of AI. Investors need to do their research to take advantage of the opportunities presented by generative AI and avoid the risks.
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