In a recent report, Morgan Stanley delved into the rapidly evolving landscape of AI integration and its impact on various industries. An update to their Q4 2023 survey, this comprehensive study highlights shifts in AI exposure and materiality across a broad range of stocks, providing a detailed map of the pace of AI change.
According to the findings, 337 stocks, representing a market value of more than $11 trillion, have changed their AI exposure categories.
This includes shifts in exposure from categories such as ‘Adopter’ to ‘Enabler’. For example, Morgan Stanley notes that AI “is now more important for 97% of utility coverage,” indicating substantial integration of AI technologies in this sector. This represents a dramatic increase from previous levels and reflects AI’s growing role in improving operational efficiency and addressing power bottlenecks.
The study also notes that the relevance of AI to investment theories has increased significantly, with 446 stocks worth $15 trillion, and that there have been changes in this area. The increased importance is driven by AI’s potential to deliver operational efficiencies, productivity gains and innovative solutions across industries.
“AI is becoming increasingly important to the investment case,” the company wrote.
Morgan Stanley emphasizes that measuring the rate at which AI changes is crucial for identifying incremental alpha opportunities. Their global mapping efforts, even at this early stage in the spread of AI, aim to provide a clearer understanding of these possibilities.
The report identifies two primary strategies for generating AI alpha:
1)’Opportunities with increasing AI materiality’: Stocks recategorized as having ‘Core to Thesis’ exposure to AI have rallied over 25% year to date. Morgan Stanley suggests that investors should continue to focus on these factors as they now show a 20% upside over Morgan Stanley’s base case target prices, compared to a 14% increase for those purely ‘Core-to- Thesis’.
On a sector basis, utilities, which have already delivered 15% YTD alpha, are highlighted for their further upside potential.
2)’Adopters with strong pricing‘: Companies classified as AI adopters with robust pricing power have outperformed companies with lower pricing power by 24% since the release of ChatGPT. Morgan Stanley expects this trend to continue, with 135 stocks identified that meet this criterion.
The report also describes significant shifts in AI exposure and materiality by sector. Utilities, materials and industries have undergone major changes, with a significant number of companies being reclassified as enablers or enabler/adopters. For example, the number of utilities labeled as ‘enablers’ has increased from approximately 3% to more than 30% in the past six months.
Morgan Stanley predicts that AI-powered productivity gains will add about 30 basis points to net margins by 2025.
“Our proprietary framework for industrial groups, focused on AI-driven efficiency gains, confirms this view, as software/internet-related groups are identified as key beneficiaries,” the report said.
“In terms of the industrial drivers of productivity gains, our framework highlights that services-oriented segments of the market have a greater opportunity with regard to 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 well over 30% of projected 2025 net revenues for the S&P 500, which speaks to the potential margin opportunities.”