'AI Capital Investment Boom' – The AI revolution will require immense capital investments, especially if the technology evolves at a faster pace than currently envisioned
Artificial intelligence (AI) is one of the top trends impacting all industries and a trend that investors need to consider for today and the years ahead as it will require immense capital investments.
As industry trends and a rapidly evolving macroeconomic and geopolitical environment shapes the investment landscape, it is important for investors to look at this environment over the long term,’ says Nick Chamie, chief strategist and senior managing director - total portfolio and capital markets, Investment Management Corporation of Ontario (IMCO). IMCO has released its World View 2024 report, which has pinpointed four main global trends that will most impact assets and the accompanying implications for investors – and AI is one of them.
The report calls 2024 ‘the year of artificial intelligence.’ It says the rapid adoption and integration of AI technology across markets and industries signals a transformative era, creating new investment opportunities.
Generative AI hits the ground running
Advances in technology were prominent across society and markets this past year, with breakthroughs in AI notably getting the attention of investors and business leaders. The latest version of AI – generative large language models – went mainstream and has the potential to be generationally transformative,
ChatGPT, a chatbot developed by OpenAI that can generate coherent human-like text, became the first application of its kind openly available to a wide audience. It peaked interest when launched, but then morphed into an all-out AI frenzy in financial markets, says the report.
Big tech hyperscalers and related equities surged, bringing broader US markets higher along with them. This technological disruption is much broader than just ChatGPT, however. The adoption of generative AI accelerated across industries and the race to build out the necessary infrastructure and future versions of the technology rushed ahead. Meanwhile, the regulation around AI is just starting to take shape, as numerous ethical and legal uncertainties remain.
“Institutional investors are most interested in what trends and events mean to their portfolio,” says Chamie. “For example, generative AI’s adoption has recently accelerated, with investment in AI spanning multiple industries. For investors, we see growth in the data centre market, which will continue rapidly increasing in the coming years. At IMCO, we are gaining exposure to this trend through our investment in DataBank.
“Another AI-driven area of growth is the greater need for data transmission capacity infrastructure in major markets. IMCO’s investment in euNetworks – a large European fibre network operator – allows us to gain exposure to this structural trend. IMCO has identified digital infrastructure as a key focus for its infrastructure program and has developed a comprehensive investment strategy to capture opportunities in the sector globally.
AI revolution requires immense capital investments
The report says that just as occurred during the dotcom boom of the 1990s, the AI revolution requires immense capital investments. According to investment bank Goldman Sachs, AI-related capital expenditures will double to nearly $200 billion by 2025, and peak at around 2.5 percent of US GDP in 2032. If, however, the technology evolves at a faster pace than currently envisioned – which has been the case thus far – the ‘AI Capital Investment Boom’ has the potential to be even bigger.
Due to AI’s substantial and rising computational and energy needs, IMCO sees growth in the datacentre market continuing to increase rapidly in coming years. The large requirements of AI, machine learning, and the ongoing move to the cloud across the IT world means the vast workload requirements will need to be met by ever-greater datacentre capacity.
IMCO says advances in AI could eventually generate disinflationary pressures as increasingly advanced technologies make it more efficient – and ultimately cheaper – to produce goods and services. This could occur along a number of dimensions such as rendering intermediate people/processes redundant (at a much lower cost), improving productivity, or boosting cost efficiency. These outcomes, however, remain highly uncertain and, if they were to occur, would likely take years (if not decades) to materialize.
Chamie notes that this year’s report made clear the durability of the themes IMCO first identified in 2023 as having the greatest impact over the coming decade.
“The entrenchment of these themes reinforces the necessity of taking the long view and a research-driven approach for institutional investors to discern the signal from the noise arising from market and geopolitical events,” he says.
Other top global trends for 2024
The other three main global trends that will most impact assets in IMCO’s World View 2024 report are:
Further fraying in US-China relations: Declining globalization, rising protectionist policies, and intensifying global competition underscore the frayed relationship between the US and China, impacting economic efficiency and free trade.
Passage of the IRA & CHIPS Act: Governments are increasingly adopting a ‘visible hand’ approach in the post-pandemic era, providing incentives to grow targeted sectors such as renewable energy and clean technology while promoting domestic social objectives.
US regional banking crisis: The retrenchment in regional bank credit opens significant opportunities for private creditors to expand lending in specific market segments such as middle-market and special situations.
