The transformative power of AI has been much-touted in the last few years. It appears the first thing the technology has transformed is the stock market itself.
Nvidia and Microsoft have spearheaded a surge in the US market driven broadly by excitement about AI. In recent weeks, the former has briefly overtaken Apple as the world’s second-largest company by market cap. This followed a more than 3000% rise in its share price over the last five years.
Nvidia, Microsoft and other large technology developers are expected to benefit from the investment in and the rollout of commercialised AI solutions over the next few years. However, the success of these solutions is not yet proven. This means that the winners among the AI service developers have not emerged either.
How, then, do we seek to invest in this revolution?
For the Henderson International Income Trust (HINT), we have spent some time assessing the progress of AI to distinguish between the actual beneficiaries and the speculative trades.
There are some realities to the AI transition that are indisputable. One widely-discussed aspect is the demand for semiconductors.
The growth of AI sits alongside the electrification of a vast array of sectors, including vehicles and supply chains, in driving semiconductor demand upward. At the same time, supply remains limited. The expertise required to produce sophisticated semiconductors has proven hard to develop for new entrants. As such, we think incumbents like TSMC have a relatively captive market share. Technology is the portfolio’s largest sector exposure at over 20%.
A less-discussed element of the AI transition are the specialist data centres required to support its functionality. These entail complex infrastructure. A core example of this is cooling. Data centres already generate significant heat due to the computing power flowing through them. In the case of an AI data centre, this rises by multiples.
For the data centre to avoid literal meltdown, complex cooling infrastructure is required. HINT invests in Nvent, which produces liquid cooling solutions. These are more efficient than the air cooling systems used in the past.
For companies to get the full benefit of AI many of them will need to bring all their data together in these data centres. Companies like database provider Oracle and IT services provider Infosys provide these services and are expected to see increased demand as a result.
The other major resource required by data centres is energy. The International Energy Agency has forecast that data centre energy demand will double between 2022 and 2026.[1] It is a simple reality that a mix of energy sources will be required to support this, as demand outstrips renewable supply. It is also a reality that most countries’ power infrastructure was not designed for the new challenges that arise as a result of both this energy demand and the new sources of energy.
HINT has exposure to the increased investment needed to meet these challenges via a number of investments ranging from utilities Enel and Iberdrola, that operate electricity grids and are renewable energy providers, through to industrial companies that manufacture equipment including Siemens and Honeywell.
[1]https://iea.blob.core.windows.net/assets/6b2fd954-2017-408e-bf08-952fdd62118a/Electricity2024-Analysisandforecastto2026.pdf
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