AI has become a tool of creative destruction. Companies that incorporate it into their business models will set the tone for the development of their sectors in the coming years. Perhaps AI will also cause a realignment in the trade and economic alliances of countries.
  |   Rainer Michael Preiss

Artificial intelligence (AI) has become a popular topic for global investors in 2023. Interest in it began to grow after the debut of ChatGPT, built on the technology of generative AI (GenAI) and introduced by OpenAI in the fall of 2022. ChatGPT became the fastest growing consumer application, and its appearance ignited a race between global technology giants – Google, Anthropic, Alibaba, Snapchat, Meta (recognized in the Russian Federation as extremist and banned. – Econs’ note) – to release applications using this technology. According to S&P Global forecasts, revenues in the GenAI sector will amount to $3.7 billion in 2023 and will increase about 10 fold by 2028.

Harvard University professor Kenneth Rogoff predicts that progress in AI applications will evolve faster than many think, and technologies like ChatGPT will already be unrecognizable in five years. A recent joint experiment by scientists at Stanford University and MIT showed that GenAI tools enabled one technology company to increase its labor productivity by 14%. According to assessment by McKinsey, such areas as customer operations, marketing and sales, software development and R&D will primarily benefit from the introduction of GenAI.

AI technologies could cause a significant redistribution of investments around the world. According to Bloomberg analysts, investments in AI could increase from $40 billion in 2022 to $1.3 trillion in 2032. Goldman Sachs economists predicted that GenAI could increase labor productivity in the United States by 1.5 percentage points per year, and in the long term, investments in this area could reach 2.5-4% of GDP in the United States and 1.5-2.5% of GDP in other major economies.

The introduction of AI technologies could cause a significant restructuring of the labor market. Nobel Prize laureate Paul Krugman believes that the boom in AI is likely to wipe out many white-collar jobs. According to Goldman Sachs forecasts, about 300 million jobs could be cut globally. The reduction in the cost of developing and implementing AI systems makes it possible to expect that OECD countries are on the verge of a technological revolution that could radically change the situation in the workplace, according to the OECD Employment Outlook 2023.

Investors form pools

Companies and industries capable of using generative AI to create shareholder value could become an important part of the story of the revaluation of many businesses and the future rotation of sectors in the US stock market and worldwide.

In 2023 the AI industry segment maintained the position of the echelon of technology companies, which in 2022 showed the worst results in the US stock market, a decrease of 24.7%, but over 8 months of 2023, the sector's securities have grown by 26,1%. The highest growth rates of prices are demonstrated by companies that have declared a focus on the development of AI functionality – Nvidia and Meta (recognized in the Russian Federation as extremist and banned. – Econs’ note): their shares from the beginning of the year to August 30 increased by 227% and 133%, respectively.

Among American stock exchanges, the Nasdaq, which specializes in high-tech company stocks, was the leader in 2023, growing by 34% in the 8 months since the beginning of the year (during this time, the S&P500 grew by 18%, the Dow Jones by 5.3%),since the revolution in AI was primarily directed at corporations such as Google or Microsoft, which are able to monetize the implementation of new technologies faster than others due to the effect of the returns to scale.

AI is becoming a tool for creative destruction, and investors are trying to identify companies that could be breakthrough market makers, like Microsoft was after the IPO in 1986 and Google after the IPO in 2004. Most professional investors (56%) in 2023 said they planned to add exchange-traded funds (ETFs) focused on AI and robotics to their portfolios, according to a survey conducted by Brown Brothers Harriman, which covered 325 institutional investors, financial advisors and ETF managers from the United States and European countries.

Companies that can incorporate AI into their business models will have a stronger impact on the stock market in the coming months and, perhaps, years. These companies will also set the tone for the development of the sectors in which they operate, since GenAI enables the optimization of operations and the automation of tasks, which leads to increased efficiency and lower costs. Investors have always been attracted to companies that could offer solutions to increase productivity and reduce operating costs.

Any company that can integrate GenAI into its business model may be reassessed by the global capital market, which means that in the future it may be able to obtain additional financial resources for business development and scaling.

At the same time, the AI market will grow as companies in the real sector realize the value of solutions based on the introduction of the new technology. As the demand for technologies and services that use AI increases, new investment opportunities will open up for companies developing these technologies, which will form a new investment cycle for innovation.

Huge opportunities and high risks

Microsoft President Brad Smith compared the emergence of AI technologies to the invention of the printing press in the 15th century: this is a fundamental discovery that will take data analysis and research to a new level and help resolve important issues facing humanity, such as, for instance, the issue of food security in the face of climate change.

AI may well change the strategic positioning of trade partners in the future and cause a realignment in the trade and economic alliances of the countries of the world. AI has already become the basis for cooperation between countries with different economic models. So, even with the strategic tension of relations between China and the United States, the amount of joint research between the two countries in the field of AI increased fivefold from 2010 to 2021, to 9,660 scientific collaborations. China is also actively developing technological cooperation with Saudi Arabia, which in 2023 created an International center for AI research and ethics in Riyadh, and according to PwC forecasts, the contribution of AI to the economy of this country will amount to $135 billion (12.4% of GDP) by 2030.

However, investments in the field of AI are also fraught with great risks, including technological ones, so top managers of technology companies and economists have spoken about the need for controls on the development of AI. The main risks of GenAI were outlined in an open letter, which was signed by more than 33,000 experts in April 2023, including well-known scientists from the world's leading universities and heads of global technology companies such as Google, Microsoft, and Amazon. The letter spoke of the need to temporarily suspend the training of AI systems that are more productive than GPT-4, due to the profound risks of losing control over civilization (link in Russian). In May 2023, The World Health Organization warned that the use of large language models such as ChatGPT, Bard, Bert etc, for medical purposes should be carried out with caution, since the training of the systems could be based on biased data and could give unreliable answers. The fears of many economists and managers about the trajectory of the development of AI are understandable: with great force comes great responsibility.