AI and robotics: the investment landscape

The fields of artificial intelligence (AI) and robotics have made rapid advancements in recent years. AI in particular has powered much of the growth in equity markets since the beginning of 2023 and we believe that we are only at the beginning of the opportunity.

In our recent paper, we highlighted AI and Robotics as one of the key megatrends that will shape the future of investing, and the only trends we identified that draw upon each of the three key structural pillars of the global economy that we identified in our note: Demographics, Technology and Planetary Boundaries. 

In this blog we dive deeper into the trends and investigate the different ways investors can gain exposure. Many will associate these trends with the large technology companies, but there are many other opportunities in the supporting industries and eventual applications of these trends. Choosing the right way to invest will help investors boost returns and mitigate risks, both in the market and with an eye on sustainability. 

Defining AI and robotics

Artificial Intelligence (AI) has no universally agreed definition, but generally encompasses various technologies, including machine learning, natural language processing, and neural networks. These technologies aim at creating systems capable of performing tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and language translation.

Robotics involves the design, construction, and operation of robots—machines capable of carrying out complex actions automatically - and is fundamentally concerned with physical machines and their control systems. The trend is closely linked to AI which is increasingly used to enhance the capabilities and flexibility of robots, allowing their use to expand beyond regimented processes such as manufacturing and into less controlled environments like homes and public spaces.

Investment opportunities

Because the potential impact of AI and robotics on the global economy is so wide ranging it can be difficult to identify where best to invest to capitalise on these trends. We break the investable universe into three stages in the investment cycle.

Upstream

Upstream investments focus on the infrastructure essential for AI development and robot production. This includes the electricity needed to power the new data centres that will be needed to run AI models. AI data centre electricity usage alone is expected to increase to 146TWh globally by 2027, equivalent to around 56% of UK electricity usage in 2022. Moreover, while AI data centres are the fastest growing part of the market they are adding to, rather than replacing, traditional data centres which are also expected to see strong growth.

^{Source: IEA “Electricity 2024”, IDC “Sustainable AI to AI for Sustainability”}

Similarly increased use of robotics will demand greater energy consumption and is expected to add around 350TWh of energy demand to the global economy by 2032, an increase similar to adding the equivalent of another UK to the global economy. Moreover, more of this demand will be mediated through battery packs, especially for domestic robots.   

Therefore, investors looking to capitalise on the upstream part of this trend should consider investing in cleaner energy generation and battery manufacture. For some investors, especially those with a sustainability focus this may not be an entirely new area, but AI and robotics add another powerful demand side factor to this trend.

Midstream

Midstream investments focus on those companies most directly involved in developing AI models, producing and designing the chips on which they run, building robots and integrating AI functions into robots. This is the part of the market that has received the most attention and investment over the last two years.

Companies like Nvidia and TSMC design and manufacture the computer chips that underlie modern computing and have seen rapid growth in the last couple of years due to AI demand. Established tech giants like Google, Meta and Microsoft are developing the AI models and leverage their resources to integrate these technologies in their existing products. 

Most investors will have significant exposure to these companies already. The four largest holdings in the STOXX Global Artificial Intelligence Index are Alphabet, Microsoft, Meta and Nvidia which make up 32.1% of the index as at 30 June 2024.  However, these companies already make up 12.5% of the FTSE All-World Global Equity Index. Therefore, while AI-focused stock returns have been exceptionally strong since the end of 2022, returns from passive global equities have also been very strong. This illustrates that the trend can be accessed cheaply and easily through listed global equities and investors can also tilt their equity holdings towards greater exposure at little extra cost..

^{Figure 1: Artificial Intelligence Index compared to global equity total returns
Source: STOXX, FTSE, Refinitiv}

Robotics is less dominated by the largest firms in the market, with smaller firms tending to focus on specialised niches such as surgical robotics. However, that may change quickly if the market follows a similar pattern to AI. During the development of AI, the large technology companies acquired many industry-leading AI companies, such as Alphabet acquiring DeepMind and Microsoft taking a large stake in OpenAI. Most of the large technology companies have robotics divisions or research ongoing and several have already made robotics acquisitions, but there is still scope for value creation from smaller and more specialised robotics firms before further acquisitions are made by the technology giants. Therefore, investors should investigate more focused funds or indices that allocate to companies that are designing and/or manufacturing robots.

Downstream

Downstream investments involve sectors which aren’t developing their own models or machines but will directly benefit from the use and application of AI and robotics. To some extent many midstream companies can access these opportunities, but there are now tens of thousands of AI startups worldwide that may be more agile in finding the best possible uses of the AI models and have significant return potential. Investing in early-stage AI startups offers high-risk, high-reward opportunities, although many may fail due to market competition and regulatory challenges and investors will face competition from the large Midstream technology companies who have been aggressively acquiring AI-related startups. 

Risks involved

While the potential rewards are significant, investing in AI and robotics is not without risks:

1. Technological risk: Rapid advancements can render current technologies obsolete, making it crucial to stay updated on industry trends and innovations.
2. Regulatory risk: Increasing scrutiny and regulation of AI, particularly concerning data privacy, ethical use and carbon intensity, could impact company operations and profitability.
3. Market risk: The high volatility and competition in the tech sector can lead to market instability, affecting stock prices and investment returns.

Sustainability considerations in AI and robotics

Sustainability will be an important factor for the future of AI and robotics. By addressing these sustainability considerations, stakeholders can ensure the development and deployment of AI and robotics align with broader environmental and social goals, fostering a more sustainable and equitable future.

Sustainability

Greater use of AI models and robots will inevitably lead to a greater demand for energy. Efforts to mitigate this include investing in renewable energy for data centres and improving algorithm efficiency and hardware. 

However, AI and robotics also have the potential to contribute positively to sustainable development goals (SDGs), such as improving healthcare, reducing waste, and enhancing agricultural practices. As long ago as 2016, Google announced that following its acquisition of DeepMind, an AI company, it had implemented AI systems that allowed it to reduce the energy usage of its data centres by 15%.

Social impact

Another major impact of the adoption of AI and robotics will be on labour markets. Many jobs will be replaced or displaced, although they will also create new opportunities. Initiatives to reskill and educate the workforce are crucial for managing this transition. AI and robotics can also enhance accessibility for individuals with disabilities, promoting inclusivity in society.

Summary of investment opportunities

For investors willing and able to invest in private markets, investing in startups can yield strong returns, contingent on identifying industry winners. However, investing in sustainable energy generation and storage infrastructure may be a better way to access returns from these trends without taking the risk of missing the startup that ends up on top.

For many investors, the simplest way to access the trends will be through the established tech giants which offer broad exposure and benefit from their substantial investments and market leadership in AI and robotics. Taking this approach will require little or no action. A market capitalisation approach to equity investing will provide you with significant exposure to these companies and any future investments they make, particularly in downstream applications of AI and robotics. While market cap investments will provide exposure to both trends, investors can apply tilts to where they see the most value creation.

Conclusion

The AI and robotics sectors are poised for significant future growth, reshaping industries and economies worldwide. Investors can choose to access these trends cheaply and easily through listed equities; with minimal direct exposure through sustainable energy generation and storage; or to maximise potential returns through venture capital. Any or all these routes offer investors a chance to boost returns and put them at the forefront of innovation in the digital age.