AI Boosts Thematic Funds Surge!

The surge in artificial intelligence (AI) investment has dramatically reshaped the landscape of public mutual funds heavily invested in the Technology, Media, and Telecommunications (TMT) sectors, yielding notable above-average returns in the first half of 2023.

As the World Artificial Intelligence Conference approaches, many institutional investors acknowledge that even though some popular stocks have been driven to inflated valuations, the long-term investment trend in this industry is of paramount importance. Their outlook for the AI sector spans decades into the future.

Currently, the AI-themed sectors in the A-share market are experiencing significant volatility. This begs the question: how much longer can this hotly discussed theme continue to flourish?

The Soaring AI Sector

In the first half of 2023, the extensive application of models like ChatGPT catalyzed a vigorous rally in the TMT sectors on secondary markets. According to data from Dongfang Wealth Choice, as of June 30, the communication, media, and computer indices recorded staggering gains of 50.66%, 42.76%, and 27.57%, respectively, making them the top performers among the primary industries tracked by Shenwan.

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Thanks to this sector-wide uptrend, equity-based Exchange-Traded Funds (ETFs) outperformed all funds in the market during the first half of the year. Three gaming-themed ETFs reported net asset value increases of over 90%, with various cloud computing and artificial intelligence-focused ETFs rising beyond 30%. In contrast, the Shanghai Composite Index rose by just 3.65%, while the average net value increase for index funds stood at 1.53%, and that for diversified equity funds showed a decline of 1.6%.

In stark contrast, indices such as food and beverage, biomedicine, and electrical equipment saw negative growth, with public funds heavily invested in renewable energy, consumer goods, and selected pharmaceutical sectors bracing for significant pullbacks, leading to frustrations among investors. Yet, high growth often comes tethered to high risk, and stock prices in the AI realm exhibit substantial volatility.

A Dual Timeline of Logic

Industry specialists perceive the meteoric rise of AI not just as a fleeting speculative bubble but also as a reflection of their optimistic view towards enduring long-term trends.

According to Li Wei, the Global Chief Investment Strategist at BlackRock, in the current overall macroeconomic landscape which appears quite grim, long-term trends are increasingly crucial for investors, and AI stands out as an industry characterized by substantial long-term potential.

Li noted that expectations surrounding AI have already ventured into a timeline decades ahead. The emergence of ChatGPT late last year acted as a catalyst in this transformation, and even though the market prices of AI-related entities have climbed significantly, there is still profound optimism for the future profitability of this sector; consequently, the existing prices should not be deemed excessively high.

“The dichotomy between long-term expectations and short-term speculative excitement is not mutually exclusive,” analyst Sui Dong conveyed. AI is undeniably a long-term trend in industrial development; while some companies’ stock prices have front-run their long-term performances, others still have room to grow along with the AI sector’s evolution.

However, Sui also indicated that the upcoming mid-annual performance assessments are creating a wait-and-see sentiment among some funds. Coupled with significant price surges in certain stocks, the immediate future for AI-themed investing appears devoid of fresh catalysts.

Chen Jiande, the General Manager of Tianlang Asset Management, concurred that the hype surrounding AI in the first half of the year is rooted in the industry's expansive developmental prospects but is also compounded by short-term speculative frenzies.

“Long-term expectations involve a reasonable forecast of the sector’s rapid growth and its penetration into daily work and life aspects. Conversely, short-term speculative enthusiasm indicates that many companies in this industry may not deliver immediate financial results, thus putting their valuations at elevated levels.”

How Long Can the AI Hype Last?

As the first half of the A-share market gracefully concludes, there is palpable apprehension surrounding potential overvaluation within the AI sector.

Luke Wenjie, Chief Investment Officer of BlackRock, asserts that there currently exists no bubble surrounding AI. He points out that "as an investment theme, there is widespread consensus that the primary targets lie in the foundational infrastructure of computing," and further elaborates, "many Chinese manufacturing sectors can participate significantly in this global theme, alongside numerous data asset companies eager to get involved."

“The AI theme may sustain its momentum into the second half. Nonetheless, following a fervent wave of speculation, the market might adopt a more rational approach, and caution is warranted regarding purely conceptual investments. Investors are encouraged to focus on companies with reliable performance outcomes,” stated Chen Jiande.

“In the near term, the valuations across the entire AI sector have reached a high point. The third quarter may offer merely transient opportunities due to concentrated institutional holdings posing a risk of pullback in the fourth quarter. Compared to AI applications with relatively low barriers to entry or models facing potential obsolescence, investors are advised to focus on foundational infrastructure and components where profitability can be realized sooner, especially on emerging sub-sectors of computation,” remarked Zhao Yuanyuan, Director of Investment at Jianhong Times.

Discussions surrounding potential investment opportunities outside of TMT also abound among experts. Sectors such as smart vehicles, photovoltaics, consumer goods, and healthcare are also receiving attention as they have recently re-entered the limelight after previous adjustments.

Sui Dong aptly notes that while alternative segments exist, confidence in sectors overshadowing AI remains obscure, particularly as robotics and smart driving belong to the AI application realm and have demonstrated performance recently; these may take the lead following AI.

“While I am interested in the AI theme, I have not deeply entrenched myself in the industry, thus I won’t pursue following mainstream investments. My focus remains on companies with stable cash flows,” remarked one insider from a private equity firm, emphasizing a spartan approach towards investments within the consumer and healthcare sectors.