Invesco Fund said in a post that the recent market fluctuations caused by the world's largest producer of artificial intelligence chips have raised doubts about whether the investment boom in AI has come to an end. As several recent reports highlight the limitations and shortcomings of this technology, skepticism about the economic benefits of the AI revolution is growing. Conversely, the expectations for AI may have reached its peak, although these expectations have not yet been confirmed by concrete evidence that this technology can improve productivity. More importantly, investors may be approaching a period of disillusionment with their fantasies, but once the macro-economic benefits become apparent, this skepticism will dissipate.

Artificial intelligence (AI) - an investment theme that still has great growth potential

From a market perspective, the initial pullback may be a 'healthy break' after the recent investment frenzy. In general, artificial intelligence is not believed to become another technology bubble in the market.

Analysis shows that the artificial intelligence investment theme has years of sustainability and still has great growth potential, although the upward trajectory of AI-related stocks may not be smooth.

Indeed, speculation about new technologies is more likely to be questioned because of its resemblance to bubbles, such as the internet bubble of the late 1990s.

Although the artificial intelligence bubble may burst one day, it will not happen in the short term. The current artificial intelligence bubble still has plenty of room to expand.

Currently, the valuation of US artificial intelligence-related stocks remains high, but it is reasonable and may continue to rise. The market's optimistic sentiment about AI may be rekindled and further boost the US stock market next year.

An industrial revolution led by digitization, big data, and artificial intelligence

Overall, artificial intelligence technology will significantly improve the total factor productivity of almost all economies worldwide, although the progress and impact of each country may vary.

It is even believed that the world is experiencing another industrial revolution led by digitization, big data, automation, and artificial intelligence.

Of course, there may be a lag between technological development and its impact on overall productivity, as the benefits of these technologies take time to penetrate into the economy.

In addition, the infrastructure of each country (including regulatory and legal frameworks) must be adjusted to fully realize the potential of each new technology.

Looking back, in the ICT revolution of the late 1980s and 1990s, core technologies took about 10 years of development to gain a foothold in the market, and it was not until the mid-1990s that their impact became widely apparent.

In the mid-1990s, due to the promotion of productivity by ICT, the US economy grew twice as fast as in the 1980s. However, as shown in the chart below, the lag between technological adoption has gradually shortened.

Therefore, although it may take about 70 years for the steam engine to be invented and widely used, history shows that the adoption speed of artificial intelligence will be faster.

There are signs that AI has begun to stimulate capital spending by companies, and the market generally believes that AI will raise US GDP growth by 1.5 percentage points per year through productivity improvements over the next decade.

The impact of artificial intelligence on the world.

The United States is undoubtedly still leading the world, and Europe may not continue the impressive performance of the previous two technological revolutions. Many emerging markets are actively embracing cutting-edge technology.

Although the artificial intelligence investment boom is sweeping the globe, the impact of artificial intelligence on developed markets may be more significant than on emerging markets, especially in the labor market.

This is because emerging markets have a younger population structure, more labor supply, lower capital intensity, less developed human capital and a primarily manufacturing-centered economy.

Some data also supports this conclusion. The International Monetary Fund predicts that in developed economies, 60% of jobs may be affected by artificial intelligence, compared to 40% and 26% in emerging markets and low-income countries, respectively.

However, although the impact of artificial intelligence on emerging markets may be weaker, its significance may not be lower than that on developed markets.

Most of the human capital and R&D costs related to artificial intelligence development are borne by developed market economies.

This means that emerging markets can use artificial intelligence as a leapfrog development tool, adopt the most advanced solutions, and save high technology development costs. Countries such as India, Israel, South Korea and China have successively begun to adopt this strategy.

Using artificial intelligence at the right time and having limited job loss risks will enable emerging market economies to occupy a more favorable position in the global technology landscape and significantly change existing investment prospects.

However, artificial intelligence users will have the greatest opportunity to capture value. The value chain of artificial intelligence is divided into three parts: support infrastructure, artificial intelligence architecture, and artificial intelligence users.

Supporting infrastructure represents dedicated hardware and platforms, artificial intelligence architecture refers to tools and systems for training and deployment, and artificial intelligence users represent enterprises and functional departments that mainly use integrated artificial intelligence software applications.

Currently, the world may be in the stage between the first two components, and it is unclear how artificial intelligence will be widely adopted and how it will change the long-term economic pattern.

Investment inspiration-technology industry.

As mentioned earlier, we are at the beginning of the era of artificial intelligence. The main driving force of this thematic market comes from the two components of supporting infrastructure and artificial intelligence architecture.

Therefore, semiconductor, semiconductor equipment, large-scale data centers, and data infrastructure stocks have recently risen.

I believe these sectors will continue to be the catalysts for the artificial intelligence market in both developed and emerging markets in the short term.

Despite speculation that there could be a potential technology stock bubble as the largest US technology stocks soar to record levels, it is unlikely to happen at least in the short term.

The technology sector in developed markets is quite popular but not overheated because the P/E ratio of the "Seven Giants" is close to 40 times, only half of that of the "Four Knights" (Dell, Microsoft, Intel, Cisco), whose P/E ratio exceeded 80 times during the heyday of the technology bubble in the 2000s. The P/E ratio of the six largest companies by market capitalization reached a high of 64 times.

In addition, strong profits of technology companies provide support for the long-term bullish market of artificial intelligence.

The market recently experienced a healthy correction as investors reassessed the long-term impact of innovative technologies, but this is not a reason to give up the theme of artificial intelligence.

On the contrary, this should lay the foundation for a more sustainable growth of the technology industry.

Given the favorable development of domestic demand for artificial intelligence infrastructure components in the US and other developed market countries, the relevant sectors are still preferred.

Investment Insights - Emerging Markets

In the second half of this year, the market environment will be particularly favorable for stocks in China, Taiwan, and South Korea. The weight of the technology industry in both indices is quite high.

Although the valuation of artificial intelligence-related stocks in China's Taiwan is not cheap, profits are gradually improving, so we will continue to observe and wait for buying opportunities when the market is significantly corrected.

Recently, the performance of the Taiwan and South Korean markets has diverged significantly. As of now, the weighted stock price index in Taiwan has soared by 30%, while the comprehensive stock price index in South Korea has performed poorly.

Although both are leaders in global chip supply, South Korean semiconductor companies have not enjoyed the artificial intelligence premium enjoyed by their Taiwan counterparts. This may be a good time to buy South Korean technology stocks.

Investment Insights - Long-term Capital Trends and Risks

In the long run, it is expected that funds will flow from equipment and infrastructure to the AI ​​integrated software application field.

Similar to the situation when 4G was introduced, I believe that with the continuous and rapid application of artificial intelligence, a new era of the new economy based on application programs centered on artificial intelligence will emerge.

However, it should be remembered that any new technology is accompanied by risks. Given the powerful features of artificial intelligence tools, unprecedented cybersecurity cases may occur soon.

Therefore, I am bullish on the prospects for cybersecurity and information technology consulting services.

Edited by Jeffrey