By James Gerlis, fund manager at Tellworth Investments
For all the equity fund managers you hear blathering about AI – I think most investors’ response is probably something along the lines of: “Well thanks, but how about using some of your real intelligence to give me some returns better than bonds?”
Touché frankly and while that’s proving a challenge, maybe it’s easy to dangle the AI carrot as a reason to stick with riskier assets.
Does the UK really offer much exposure to AI anyway?
You’ll struggle to get through a UK small-cap pitchbook without a slide on AI – with the narrative usually ‘threats and opportunities’ but the latter outweighs the former.
Much of the conversation around AI so far has focused on the US and understandably so given it is the home of many of the Big Tech companies, which have been driving research in the field and leading its commercialisation. The US stock market has reflected with enthusiasm the view that US Big Tech will be a major beneficiary of AI, with the 63% year-to-date performance of the ‘Magnificent Seven’ arguably driven by this theme.
Exacerbated by the lack of equivalent tech heavyweights in its listed market, the UK has not been able to capture the limelight to nearly the same extent on the topic of AI. In fact, much of the discussion focused on the negatives for incumbent businesses. However, despite the relative lack of coverage, the UK punches above its weight in AI against its global peers.
In fact, the most widely available ranking of AI intellectual property and investment positions the UK as fourth largest globally. This tees us up nicely for the predictable decline from inventor to has-been – be it rugby, radio telecommunications or T’internet. Is there any reason for it to be different this time?
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The UK has a strong foundation in AI, with a history of R&D in the field dating back to the birth of computing. Some of the UK’s world-class universities have been integral to the development of the subject, supported by government-funded research centres such as the Alan Turing Institute.
Furthermore, AI has been an area of strategic focus for the government, reflected in the launch of the National Artificial Intelligence Strategy in 2018 and a £1bn AI Sector Deal, supported more recently by an expansion of funding in the 2023 Budget.
Though there are those with deeper pockets – the US and China, for instance, have launched AI investment programs of greater scale – the UK benefits from an established ecosystem around AI, which reflects a strong base level of capability and talent. The fact that various highly regarded AI companies, including Google’s DeepMind and Graphcore, are based in the UK is a testament to this.
AI’s divergent impact on the UK stock market
In terms of what all this means for the stock market, it is notable that the perceived implications of AI for UK-listed companies have been broadly negative.
Future, for instance, has experienced a material derating this year. The narrative of AI fuelling a proliferation of digital content, and a potential change to the Google search-led world order, have been important drivers of the publishing company’s declining valuation, leaving the former stock market favourite trading on a particularly modest 5.5x PE.
Whilst we share concerns about the challenges some business models face with AI, balance to the argument is being missed and, in some cases, the AI threat may be overestimated.
A positive case for Future, for example, is that AI tools supercharge the company’s ability to generate quality content, which can be leveraged across a broad set of well-respected publications across a wide range of verticals.
Similarly, the prevailing view on the impact of AI on Moneysupermarket is at best neutral, given that a high proposition of existing traffic is sourced through search. However, in a world where the effective monopoly of Google search is broken by the proliferation of chatbots from a range of providers, is it possible that more competition could reduce Moneysupermarket’s biggest cost item – paid search – and boost margins, rather than undermining the business model itself?
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There are also examples of under-the-radar beneficiaries that we think could get more airtime as the implications of AI play out.
EMIS is a company potentially on its way out of the stock market now that the Competition and Markets Authority has given provisional clearance for the takeover by UnitedHealth. However, as a holder and processor of NHS data, we see significant scope for AI tools to be applied to generate valuable insights around health trends and preventive care that could be beneficial to the UK’s healthcare system.
Equally, we expect that the latent value of YouGov’s vast proprietary data assets will increasingly come to the fore as improved analytical tools augment existing capabilities and provide new routes to monetisation.
The growth of AI should prove helpful as a structural driver of demand for Gooch & Housego. Whether this manifests as persistent demand for the semiconductor equipment required to support ever-greater processing power requirements or the need for improved undersea cabling to facilitate a higher rate of cross-border information exchange, the company can expect long-term demand for its specialist electrical components to persist.
Catching our breath after the initial excitement around AI reaching the mainstream, there are clearly many unknowns from here and the impact on many UK companies will run both ways. However, as always, UK investors remain on watch for the key risks and opportunities – there may come a time when AI can fill this role, too… but until then we’ll keep plugging away.
