New age AI investment

THE next stage of the artificial intelligence (AI) investment story is expected to reward investors who look beyond dominant technology names and focus instead on companies that can convert AI spending into sustainable earnings growth.

As the technology matures, fund managers and wealth strategists believe opportunities are widening across the value chain, although elevated valuations and intensifying competition mean stock selection will become increasingly important.

While enthusiasm surrounding AI remains strong, market observers say the current cycle is becoming more nuanced than the initial rush into semiconductor and cloud computing stocks.

The focus is gradually shifting towards businesses that can show measurable productivity gains, durable cash flows and long-term pricing power, while also identifying beneficiaries across Asia’s technology supply chain.

According to Eastspring Investments, AI represents a technological shift unlike previous innovation waves because of its ability to reshape decision-making rather than simply improve communication or efficiency.

“AI stands out in two ways. First, where previous technologies changed how people accessed, communicated and consumed, AI changes how they think, decide and create.

“Second, it can be applied across industries, giving it a broader opportunity set, while its foundation on existing digital infrastructure lowers barriers to deployment and accelerates adoption,” the asset manager says.

Eastspring Investments says the speed of AI adoption is unprecedented, creating both opportunities and risks for investors. “As AI adoption is both faster and broader than in previous cycles, the speed can compress market cycles, leading to sharper swings in expectations and valuations. This makes it even more important for investors to distinguish winners from laggards,” it notes.

History also offers useful lessons, Eastspring says, pointing out that every major technology cycle has experienced periods when optimism outpaced reality.

“Leadership changes over time, value often becomes concentrated, and periods of excessive optimism can create concentration and valuation risks. This makes disciplined stock selection critical,” it points out.

Rather than viewing AI as a standalone investment theme, Eastspring Investments sees it as the latest chapter in a series of technological advances built upon earlier innovations.

“The Internet enabled connectivity and platforms, mobile extended this through devices and ecosystems, and cloud remains the backbone for AI,” it highlights.

Unlike previous technology booms, however, AI is still firmly in its investment phase, with spending heavily concentrated on computing infrastructure and data centres.

Although comparisons with the dot-com era are inevitable, Eastspring Investments believes the current cycle differs in several important respects, saying: “AI disruption is real and monetisation is increasingly visible but remains uneven, with earnings still driven by a relatively narrow group of leaders.”

It adds that demand continues to outpace available computing capacity, while hyperscale technology companies are increasingly competing to secure production capability rather than lower prices.

“With production capacity now the constraint, it is no longer about price, but about who can deliver quickly and at scale,” it argues.

Where value lies

Eastspring Investments expects AI to evolve through multiple stages over many years rather than follow a short-lived investment boom, noting: “The AI cycle is likely to unfold across multiple phases within a longer-term structural trend, creating a broad set of opportunities.”

Nevertheless, investors should remain mindful of elevated expectations.

“At this stage, the key risk is in overpaying at the wrong point in the cycle. The focus should be on identifying companies that are already monetising AI or have clear pricing power, and can scale, execute and compound as the cycle matures,” it says.

Eastspring Investments also believes investors should broaden their geographical perspective rather than focus solely on large US-listed technology companies.

“While the United States has played a key role in AI creation, the Asian supply chain manufacturers have formed a backbone to all the developments and progress that AI has made over the past four years,” it says, adding that manufacturers across Taiwan, South Korea, China and Japan are expected to remain integral as AI progresses from generative AI towards agentic and physical AI applications.

“Understanding where value is created and how Asia captures it is critical for investors.”

That view is shared by HSBC Private Bank and Premier Wealth, which believes investors are entering the next stage of AI investing.

The group’s chief investment officer Jonathan Sparks says: “The AI trade opportunity is broadening beyond chips and cloud towards AI-enabled earnings growth. This earnings season, investors will look for proof that AI is cutting costs, streamlining workflows and improving customer service.

“Companies delivering tangible productivity gains, margin expansion and stronger free cash flow should see higher valuations and outperform.”

Opportunities in Asia

Asia remains a major beneficiary, given its dominant role across the semiconductor ecosystem.

Sparks notes: “Asia remains central in the global AI hardware chain, spanning semiconductors, advanced packaging, memory and the wider infrastructure powering AI.”

He adds that rising AI capital expenditure is boosting demand for Asian suppliers of chips, components, data centres, connectivity and power networks, creating a broader, lasting investment opportunity and diversifying portfolios beyond US technology.

Beyond technology itself, HSBC also sees AI reshaping other sectors through rising electricity consumption.

“AI and electrification are driving a multi-year surge in global electricity demand, fuelled by power-hungry data centres, electric vehicles, industrial automation and energy transition,” Sparks points out.

“Beyond the utilities sector, we see opportunities in power infrastructure: grid upgrades, transmission, substations, transformers, storage and energy management, supporting resilient earnings through the decade ahead,” he adds.

Staying selective

Meanwhile, OCBC Group believes investors should become increasingly selective, particularly within software companies facing structural disruption.

Its group managing director and chief investment strategist Eli Lee recently warned in a note that although software earnings have remained resilient, valuations have already adjusted sharply as investors reassess the long-term competitive landscape.

“While the software segment’s near-term earnings have been resilient, valuation multiples have declined significantly from the 2025 peak on concerns about vulnerable terminal values, as AI increases competitive pressures and erodes software moats,” he writes.

He expects competitive pressures to remain elevated as AI-native companies seek public listings and accelerate the commercial rollout of large language model applications.

“We are, therefore, selective in software and investors should be prepared to ride through a potentially protracted period of weakness and volatility for selective vulnerable sub-segments,” he points out.

Lee sees cybersecurity as one of the more resilient software segments.

“We think cybersecurity stands out for its moat defensiveness because AI increases security risks and regulatory requirements, thereby providing structural tailwinds for the industry,” he says, adding that larger cybersecurity firms should benefit from industry consolidation, while AI-native businesses are more likely to complement rather than replace incumbent security providers.

Beyond software, OCBC believes the AI investment opportunity is becoming more diversified as demand shifts towards inference-related technologies.

“Overall, we think the broadening of the AI trade to AI inference beneficiaries (such as application-specific integrated circuit, central processing unit, memory, storage, networking) is a positive development, as it allows participation in AI growth with diversification across more sub-segments and names,” Lee says.

Even so, Lee cautions that investors should remain disciplined as recent gains may have stretched valuations.

“Investors should also take valuations into account in assessing the risk-reward offered by AI inference beneficiaries as the recent strong momentum could suggest stretched positioning,” he argues.

He notes that semiconductor foundries remain well positioned as long as computing demand continues to grow, while major Internet companies also appear attractive because of their relatively weaker share price performance compared to semiconductor stocks and their potential to benefit from both internal and customer-facing AI applications.