Projecting the Future of AI Investments

Quality US tech selections
With the possibility of a rate cut on the horizon, BEA Union Investment turns increasingly optimistic towards risk assets, including tech shares that are poised for structural growth. Alongside Asia Pacific, we hold a preference for US tech equities. While attention has been focused on the Magnificent 7, we emphasise the importance of only considering quality companies with intact fundamentals, especially those that operate in strategic areas, such as semiconductors and servers, which offer significant investment potential.

Semiconductors stand as the bedrock of technological advancement, indispensable for the functioning of smart phones, personal computers, data centres, the Internet of Things, and cloud computing, among others. Across the supply chain, spanning design to production, it comprises various companies that offer diverse investment opportunities. Historical data shows that the upward trajectory of the semiconductor cycle typically runs six to eight quarters. Presently, we find ourselves in the nascent phase of this cycle, with future growth likely driven by the catalytic advancements and application of Artificial Intelligence (AI). Taiwanese and South Korean semiconductor producers continue to demonstrate resilience, alongside AI-focused semiconductor design firms in the US. Two prominent US players in the AI space, with both boasting ample cash reserves, witnessed year-on-year respective surges of 765% and 3076% in their fourth-quarter earnings. As of today, demand sharply outstrips supply in the AI semiconductor design and manufacturing realms. With ample room for growth, our teams believe the AI narrative as a multi-year story, with leading firms positioned for exponential growth. Numerous semiconductor giants have recently predicted that the AI semiconductor market could potentially rise tenfold within the next three to five years.

Opportunities abound in AI chip design and production, as well as AI servers

Research from an investment bank showed the CAGR for Edge AI and custom AI semiconductors are projected at 26-95% between 2023 and 2027. Edge AI chips enable smart devices to run faster without having to link up with the cloud or offsite servers. As for General AI semiconductors, they primarily focus on developing human cognitive aspects such as language, reasoning and vision, whereas Custom AI semiconductors allow programmes to adapt to the unique needs and preferences of individual users. The effective functioning of AI algorithms hinges on the processing and storage of massive data, necessitating special servers, hardware and software designed for AI. Therefore, US companies with leading positions in the AI server and storage markets will gain a competitive advantage. Our growing optimism for this sector is further bolstered by the anticipated benefits from the US CHIPS and Science Act enacted in 2022, with CHIPS referring to Creating Helpful Incentives to Produce Semiconductors. This legislation involves government investment of US$280 billion to enhance research and development in semiconductor, including US$52.7 billion allocated to incentivize semiconductor production within the US. This strategic initiative is expected to empower US semiconductor companies to challenge the dominant positions of their Taiwanese and South Korean counterparts. While establishing production lines takes time, the outlook suggests a potential decline in the costs of AI semiconductors, thereby providing support to AI servers and storage solutions providers.

The precise timing of the US monetary policy shift remains uncertain, but our investment teams expect it will likely occur around mid-year. Investors are encouraged to stay invested. Once rates start easing, tech firms dependent on massive funds for research and development to fuel expansion will stand to benefit. Combined with the boundless growth prospects in the AI field, the tech sector's long-term outlook remains promising.