AI Stocks Fall. Smaller Stocks Surge.

Equity investors are reevaluating their positions in leading AI companies due to concerns over the sustainability of their rapid advances. The AI-driven rally, led by companies like Nvidia, has sparked a market shift towards smaller, less obvious stocks, including utilities and real estate, which have outperformed in the current quarter.

The surge in AI stocks, particularly Nvidia, has been substantial since the introduction of ChatGPT in late 2022. However, geopolitical tensions and changes in global monetary policy are causing investors to seek new opportunities. The rotation away from tech giants is influenced by the broadening of the AI theme beyond traditional tech and communications sectors, expanding into areas such as utilities, property, and other industries that could benefit from AI implementation.

Utilities have seen a rise in interest due to the increased electricity demand from the tech industry. The International Energy Agency estimates that usage by data centers, AI, and cryptocurrency could double to more than 1,000 terawatt-hours by 2026. This demand has brought attention to utility companies worldwide, such as Dominion Energy and Southern Co. in the US, and Southeast Asia’s YTL Power International and Gulf Energy Development.

The need for power infrastructure, including transformers, has also grown. The shortage of transformers, with long wait times for delivery, has boosted the shares of leading manufacturers like General Electric, Schneider Electric, and Hitachi. Energy infrastructure is becoming a significant investment theme, with AI increasing the demand for energy consumption.

Renewable energy companies are also benefiting from the increased power usage, as there are concerns about pollution. Companies involved in solar, hydro, wind, and nuclear power are being considered potential beneficiaries. China’s leadership in alternative energy and significant solar cell production highlights the importance of renewables, with companies like China Yangtze Power and Sichuan Chuantou Energy gaining investor attention. Additionally, companies such as Vestas Wind Systems in the Netherlands and Doosan Fuel Cell in South Korea are seeing a spotlight on their stocks.

Copper, a key material in electric cables and data center cooling systems, is also experiencing a surge. Stocks like Freeport-McMoRan, BHP Group, and Jiangxi Copper are benefiting from the increased demand for copper, driven by AI’s energy requirements.

Data centers, crucial for hosting AI computing facilities, are in demand for land close to power sources and major AI customers. Real estate investment trusts specializing in data centers, such as Equinix, Digital Realty Trust, and Keppel DC REIT, have seen their shares rise. Companies like Goodman Group in Australia have also benefited from the AI boost. Southeast Asia is becoming a notable AI hotspot, with local telecommunications firms like Telekom Malaysia and Advanced Info Service in Thailand exploring data centers as new growth engines. Philippine telecom PLDT is considering a partial sale or REIT listing of its data center portfolio.

Industrials and health care are also expected to benefit from AI. Morgan Stanley estimates that companies implementing AI to improve their businesses will see significant gains. Examples include Deere & Co., which uses AI to optimize farming, and Paccar Inc., which designs large commercial trucks. The health care industry, particularly in accelerating drug development, is also expected to benefit, with smaller biotech stocks like Recursion Pharmaceuticals and Schrodinger being recommended.

The sell-off in major tech stocks has caused significant market turmoil, with indices like the S&P 500 and Nasdaq experiencing substantial declines. The sell-off was driven by disappointing results from companies like Tesla and Alphabet, leading to a broader reevaluation of tech stocks. Investor concerns about high expenditures in AI without immediate revenue benefits have contributed to the cautious outlook. This has led to a shift in investment towards less obvious sectors, as the broader market shows signs of fragility.

​The decline in tech stocks has broader economic implications, affecting investor confidence and causing increased market volatility. The interconnected nature of the global tech industry means that declines in the US tech sector have repercussions in Asian markets as well. This highlights the potential for a more widespread economic slowdown if the tech sector’s struggles continue.