Wall Street is predicting AI will be a trillion-dollar market, and the valuations of big tech companies reflect that sentiment: Nvidia shares are up nearly 170% so far this year, making the GPU maker's stock increasingly expensive to own.
Portfolio manager Stephen Pace and investment specialist Richard Gall at Baillie Gifford, a global asset manager with $264 billion in assets under management, believe US investors are missing out on international AI opportunities and are paying the price.
Their solution is to start looking overseas for more profits.
Baillie Gifford sees the top of the S&P 500 index as an indicator that there are better investment opportunities elsewhere. The recent surge in big tech companies and AI has led investors to focus on the U.S. market, leading to the index's 19% gain this year.
International stocks haven't rallied as much and are trading at more attractive (i.e. cheaper) valuations. “Because of that leadership, the equity market has become very narrow, but I think that's an inefficiency that you can take advantage of by investing in international stocks outside the U.S.,” Pace told Business Insider in an interview.
AI Opportunities Abroad
Baillie Gifford sees the current valuation gap between U.S. and international stocks as an opportunity to buy at attractive prices companies that are poised for big future growth, particularly in the artificial intelligence sector.
“The misconception that the US only has high-quality, innovative companies is completely false,” Pace said. “The US has some companies that are absolutely essential to the advancement of AI.”
For example, the semiconductor supply chain is geographically distributed across the world, with multiple entry points for investment. Taiwan dominates the semiconductor industry and is home to the world's largest semiconductor foundry, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). Much of the equipment needed to manufacture semiconductors is produced by ASML in the Netherlands. Japan is also a major market for semiconductors and electronics.
Aside from AI investment opportunities, macroeconomic trends outside the U.S. are also providing a favorable environment for international stocks.
Interest rates around the world are due to fall in 2024 to boost growth and investment. Central banks in Europe, including Sweden and Switzerland, have cut interest rates, and Pace believes the Bank of England will soon follow suit.
The only exception to this trend is Japan, where policymakers are moving away from a negative interest rate environment, but the fund sees this as a positive development for Japanese stocks: As consumption and business investment increase, the Bank of Japan will no longer need to rely on negative interest rates to boost consumer behavior.
International markets offer U.S. investors excellent value and portfolio diversification opportunities. “Regional markets are full of great opportunities that can generate significant profits for those willing to put in the effort to find them,” Gall said.
5 Underrated AIs Internationally
With international stocks making up 40% of the global market, Baillie Gifford believes not investing abroad severely limits opportunities for U.S. investors. Below are five international companies the fund sees as winners in the AI revolution overseas.
