Larger firms with big cash reserves and datasets are pulling ahead in the IT war, according to analysts.
In a world of low growth and inflation, artificial intelligence (AI) is increasingly being used by companies in a bid to gain an edge on their competitors.
This revolution has just been dissected by UBS analysts to see how machine learning, natural language processing and other AI tools change the investment picture.
Their findings highlight the rise of ‘superstar’ firms, with quality, momentum and large caps among those doing well at the expense of underperforming value and small cap stocks.
That is because larger firms with higher margins and cash reserves tend to invest the most, with their extensive datasets also able to create far greater production efficiencies.
This leads to a significant increase in industry and market concentration, as investors look to own the high growth stocks best placed to lead disruption.
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The UBS stock screen names 17 companies where AI is facilitating the rise of superstar firms through expanded product offerings or geographical reach.
These are Zoom Video Communications (NASDAQ:ZM), Arm Holdings suitor NVIDIA (NASDAQ:NVDA)., Booking Holdings (NASDAQ:BKNG), ASML Holding (NASDAQ:ASML), EQT AB (NYSE:EQT), Evolution Gaming Group (OMX:EVO), NetEase (NASDAQ:NTES), Taiwan Semiconductor (NYSE:TSM), NAVER Corp., M3 Inc., Eisai Co., Fortescue Metals (ASX:FMG), Magellan Financial (ASX:MFG), Aristocrat Leisure (ASX:ALL), Lens Technology, Shenzhen Kangtai Biological Products and Contemporary Amperex Technology.
As the list shows, the forces of AI disruption have been most prevalent in the United States, Asia Pacific and China, as well as in the consumer-related and IT sectors.
The research said:
“In a world devoid of growth and inflation, interest rates look to remain anchored. As a consequence, the cost of deploying technology is cheap, so we can expect this theme to continue.”
One of the consequences of this market concentration is a significant dispersion in earnings outcomes within sectors, leading to an opportunity for active fund managers to outperform.
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A closer look at AI disruption also reveals a strong relationship with the underperformance of value investing. Large expensive names have demonstrated a more stable performance over the past decade, a trend that has become even more noticeable over the past three years.
The research said: “The benefits of lower rates accrue primarily to larger firms that are better positioned to deploy AI solutions. So not only does the deployment of AI cost large firms less, but they tend to benefit the most from AI disruption.
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