For investors who fear getting caught up in an AI-driven bubble that may one day burst, there’s a “perfect” trade.
Bank of America strategists have outlined what they believe is the “perfect hedge” against the burgeoning artificial intelligence trade — “a way to invest in AI without investing directly in it,” they wrote in a note Thursday.
Analysts said investors should focus on “transition strategies” that benefit from proximity to AI while offering protection from “AI-driven fluctuations supported by policy, geopolitical and supply chain fundamentals.”
The bank said analysts do not believe the bull market in stocks represents an AI bubble, but acknowledged there are risks for investors, especially given high valuations in the tech sector. The price-to-earnings ratio for the NASDAQ 100 is approximately 37 times, while the price-to-earnings ratio for the S&P 500 is approximately 22 times.
Still, strategists said AI presents a significant opportunity for investors who want to maintain exposure to the technology. The bank estimates that AI-related investment spending will triple to about $1.2 trillion by the end of 2010.
“Valuation discussions and timing cannot be ignored,” the strategists wrote. “We are screening high-quality, growing, ‘low AI beta’ Buy rated companies,” they added, highlighting areas that could benefit from AI trade while adjacent to the technology sector itself.
If you want to protect yourself from bubbles, banks think this is where you should put your money.
1. Electrification
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paper: While energy demand is expected to grow due to AI, analysts suggest that demand in this sector is primarily driven by other factors, such as new regulations.
“We expect overall electricity and grid demand to remain very strong, driven by EVs, increased electrification, and a growing global focus on energy independence,” they wrote.
2. Infrastructure and power grid expansion
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paper: “Electrification of transportation, heating, and industry requires significant investments in energy storage, grids, and low-carbon power. Broad-based electricity demand growth should also support further strong orders for infrastructure such as grid equipment and cables,” BofA wrote.
Strategists said they believe power grid operators, transmission equipment, storage solutions and renewable energy developers will be the “core beneficiaries” of this category.
3. Metal
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paper: Due to the need for more energy, certain metals associated with electrostatic charges are also increasing. The bank pointed to metals such as copper, silver, lithium, aluminum and nickel.
“Growth in demand for metals is becoming less cyclical as economies rebuild their energy infrastructure. The construction of power generation capacity and transmission and distribution lines is increasing aggregate demand for copper and aluminum. Our commodity strategy expects this structural trend to continue at least through the end of the century, albeit with peaks and troughs in spending.”
4. Defense
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paper: BofA says governments are increasing their defense budgets and are interested in investing in all areas related to AI trade, including computing power, AI algorithms, robotics, energy and new materials.
“Security resilience is a structural trend that cannot be ignored; defense budgets are expanding,” the strategists wrote. Together, these efforts represent trillions of dollars in long-term investment and will drive demand for next-generation technologies. ”
