Generative AI: What’s all the hype?

Generative Artificial Intelligence (GenAI) is reshaping how industries function – with the financial industry being no exception. Luca Menozzi, Thematic Research Analyst at Julius Baer, explores its impact and the enormous potential it presents, and ultimately how external asset managers can embrace this trend.

By Luca Menozzi Director, Thematic Research, Bank Julius Baer & Co. Ltd.

Generative Artificial Intelligence (GenAI) has become a focal point of excitement in recent months. The sector has rapidly evolved, with an increasing number of companies openly exploring ways to integrate this technology into their offerings. Investors have been quick to grasp the enormous potential for monetisation that GenAI presents, leading to substantial investments in search of the next billion-dollar enterprise.

The long-term view

The long-term opportunity looks clear to us, as AI has the potential for enhancement in labour productivity and for a boost in global GDP growth. But also, from a bottom-up perspective, there are many potential benefits. AI could represent the next leg of growth for many enterprises. Indeed, companies can lift their revenues base either by providing new AI-powered tools, which demand a higher selling price, or by creating new products and expanding their addressable market. At the same time, AI can be used to automate functions and cut costs, thus lifting margins. Furthermore, enterprises that embrace AI could gain better insights into their investment opportunities, leading to better capital allocation decisions, higher returns on investments and sustained competitive advantages.

Three primary beneficiary groups

Within the AI landscape, we discern three primary beneficiary groups: semiconductor companies, cloud computing providers, and AI enablers/adopters, primarily comprising software firms. While the semiconductor sector offers the most immediate prospects for rapid monetization, as more leading-edge chips are needed during the build-up phase of the AI infrastructure, each of these clusters harbours both promising and less compelling opportunities. Generally, cloud service providers will need to step up their investments in AI capabilities, which might hurt their short-term profitability in the name of higher future growth. While software companies need time before seeing their products being fully integrated by enterprises.

The AI transformation will not happen from one day to the next. Rather, it will be a multi-period process. We warn investors to watch out for hypes in expectations and overcapacity in the infrastructure, as this might create air pockets and market corrections. So far, we haven’t seen any red flags and we remain constructive on the AI theme.

The recent strong market performance was propelled by fundamental improvements and a re-evaluation of valuation metrics. While valuation metrics look rich from an absolute point of view, they are somewhat justified, given the quality of business models and the boundless potential of GenAI. The foundation is laid for significant future growth. However, we invite investors to separate true AI innovators from those who may have prematurely entered the arena without delivering compelling or innovative products.

AI use cases

The scope of AI use cases continues to expand at a staggering rate, but our conviction is that we are just scratching the surface of what AI will be able to do in the future. So far, we have seen a proliferation of chatbots and AI assistants being integrated across different products and industries. AI is poised to enable machines to amalgamate video and audio recognition with speech models and other sensory inputs, thus expanding their accuracy and functionalities in domains like autonomous driving and robotics, among others. Our belief in the burgeoning number of use cases across diverse sectors fuels our expectation of a surge in innovation in the years ahead.

AI risks

Public sentiment and regulatory oversight could potentially act as brakes on the development and adoption of GenAI. Consider scenarios where AI fails to deliver expected results or is maliciously employed, such as in cyberattacks leveraging AI capabilities. In such a scenario, the trust we put in AI could be scratched and its penetration into our economies hampered. Generally, we see regulation as a double-edged sword that might have a positive, as well as a negative, impact on the evolution of GenAI. We welcome regulation when it makes the technology safer and incentivises further adoption.

GenAI’s role in asset management

While the surge in all things AI has been robust thus far, our constructive outlook on the theme remains steadfast. This is underpinned by our belief that the drivers behind AI's growth remain robust, with innovation accelerating, monetisation opportunities ripe, and earnings expectations on an upward trajectory since the year began.

In conclusion, the excitement surrounding GenAI is well-founded, and we foresee it continuing to reshape various industries and foster innovation. Wealth managers can harness the power of GenAI to enhance their investment strategies and client services. However, the path forward may not be without its challenges, as public perception and regulatory considerations come into play. Despite these potential roadblocks, the AI landscape appears poised for continued growth and advancement, offering compelling opportunities for investors and stakeholders.

Biography

Luca Menozzi is a Director at Julius Baer, a Swiss-based bank in Zurich. As a Thematic Research Analyst responsible for the ‘Digital Disruption’ theme, he focuses on the impact of  technological innovation on the global economy and specifically he covers themes such as cloud computing, AI, digital commerce, cybersecurity and automation and robotics. Prior to joining Julius Baer in Zurich, he worked in London for Ninety One Asset Management where he was an equity analyst in the Multi Asset team and for Bank of Montreal Asset Management where he was as an investment analyst covering multiple asset classes and sectors. Luca started his career in a private bank in Milan and obtained a bachelor’s degree and a master’s degree in Economics and Finance from Bocconi University in Milan.