Morgan Stanley's Deep Dive on AI's Rate of Change via

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In a recent report, Morgan Stanley highlighted the rapidly evolving landscape of AI integration and its impact on various sectors. This comprehensive study, an update from their fourth quarter 2023 survey, points to changes in AI exposure and materiality across a wide array of stocks, providing a detailed map of AI's rate of change.

According to its findings, 337 stocks, representing more than $11 trillion in market value, changed their AI exposure categories.

This includes changes in the visibility of categories such as “Adopter” to “Enabler”. For example, Morgan Stanley notes that AI “is now content for over 97% of utilities' coverage,” indicating substantial integration of AI technologies into the sector. Addressing performance and power constraints.

The study also notes that the materiality of AI in investment papers has increased significantly, with 446 stocks, valued at $15 trillion, seeing changes in this regard. The growing importance comes from AI's operational efficiencies, productivity gains, and ability to deliver innovative solutions across industries.

“AI is becoming increasingly material for an investment case,” the firm wrote.

Morgan Stanley emphasizes that measuring AI's rate of change is critical to identifying opportunities for increasing alpha. Their global mapping effort, even at this early stage of AI diffusion, aims to provide a clear understanding of these opportunities.

The report identifies two primary strategies for generating AI alpha:

1)'Competent with increasing AI materiality: Stocks reclassified as exhibiting “cover-to-thesis” with AI have seen gains of over 25% year-to-date. Morgan Stanley suggests that investors should continue to focus on these enablers, as they now show a 20% upside to Morgan Stanley's base case target prices, compared to just the “core to thesis.” There is a 14% increase for those.

On a sector basis, utilities, which have already delivered 15% alpha YTD, are highlighted for their further upside potential.

2)'Adopters with strong pricing power': Companies classified as AI adopters with strong pricing power have outperformed those with low pricing power by 24% since the launch of ChatGPT. Morgan Stanley expects this trend to continue, with 135 stocks meeting the criteria.

The report also details significant changes in exposure and materiality of AI by sector. Utilities, materials, and industries have seen major changes, with a substantial number of companies reclassified as enablers or enablers/adopters. For example, the number of utilities tagged as enablers has increased from about 3% to more than 30% over the past six months.

Morgan Stanley projects that AI-enabled productivity will add about 30 basis points to net margins by 2025.

“Our proprietary industry group framework focused on AI-driven performance enhancement confirms this view as software/internet-related groups screen as the biggest beneficiaries,” the report said. As,” the report said.

“In terms of industrial drivers of productivity gains, our framework highlights that service-based pockets of the market have a more significant opportunity for AI-driven efficiency gains,” it adds.

“These groups include software services, consumer services, healthcare equipment and services, financial services, and media and entertainment. These groups alone represent more than 30% of the projected 2025 net income for the S&P 500, which That indicates potential margin opportunities.

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