Morgan Stanley’s Chief Investment Officer Mike Wilson has a reputation for being a bear. His predictions for 2023 might not have come true but market analysts around the world, especially in the USA, hang on to every comment of his and discuss it threadbare.
The CIO believes that by November 2024, the S&P500 would not deliver exciting returns to investors, and would rise by barely 2%. He also believes that the US markets are in for a painful year in 2024 as years of inflation and biting interest rates will dampen consumer sentiments, and animal spirits in the economy.
Having said that, Morgan Stanley has unveiled several reports that spotlight strategies, stocks and principles to follow for investors looking to ride the AI boom.
The financial services behemoth advises investors to zero in on the shares of larger and dominant companies that are quick to read the direction in which the tech wind is blowing. Secondarily, investors would benefit by weeding out those companies that are not AI-ready. Several frontrunner companies in different segments are allocating resources, both monetary and human, to leverage the power of AI, with a clear-sighted target of boosting operational margins and the bottom line. Investors will do well to focus on these stocks.
Companies that specialize in semiconductors are most likely to succeed in the AI race. However, investors ought to be cautious enough to pick companies with low valuations, while simultaneously keeping an eye out on their earnings growth.
Morgan Stanley analysts have also urged investors to look beyond the ‘Magnificent 7’. Several firms from the consumer discretionary, healthcare and financial backdrop stand out as prospective beneficiaries of the AI boom.
For the benefit of investors, the investment banker has classified AI leaders into four separate categories. Let’s dive in and understand the categorization better.
- Margin expanders
This silo includes companies that are tapping into the power of AI to cut back on their costs. Examples of margin expander firms include software companies that are using Generative AI to write code, effectively helping the firms cut back on R&D costs. Additionally, tax accounting firms are also using Generative AI to process more tax filer information, and consequently file more returns leading to massive savings in time and human resource costs.
This silo comprises Moody’s, Pinterest, Twilio, Spotify and more.
This particular category includes companies that are paving a new way ahead by creating AI-powered services that are aiding the company’s sales efforts or improving operating margins by creating new revenue streams. In the trailblazers category, Morgan Stanley has enlisted companies like Adobe, DoorDash, Etsy, Zillow, GoDaddy and more.
- Price raisers
This section includes companies that are tapping into enhanced AI capabilities to raise the price of their offerings. The invest banker, in one of its reports, cites the example of Zoom Video communications. The platform is offering enhanced AI capabilities to its users, which helps them compose chat responses, generate meeting summaries and summarise chat messages.
Other companies like Shopify, Autodesk, Pagerduty and Atlassian are included in this compartment.
- Input suppliers
Companies that form the building blocks of AI technology, and help customers produce data-management tools, data centres and other managerial software are included in this section. Nvidia, Snowflake, Advanced Micro Devices, Gartner and more are a part of this category.
Risks that need to be monitored
Morgan Stanley while suggesting several AI picks has also cautioned investors that AI could be “another bubble”. The investment banker has marked out that the past few years have seen quite a few bubbles like cryptocurrency, 3-D printing, and work-from-home stocks burst. If the current wave of excitement working in favour of these stocks does not yield considerable changes, in the near term, chances are that the AI picks could perform badly.
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