Great rotation trade turns spotlight on less obvious AI winners

Signs that equity investors are getting cold feet over the rapid advances in artificial intelligence leaders have put a spotlight on some less obvious beneficiaries of the technology boom.

A sevenfold surge in shares of Nvidia Corp since the launch of ChatGPT in late 2022 helped drive a megacap-led rally around the world. But concerns over the sustainability of those gains as well as geopolitical tensions and shifts in global monetary policy are now driving a broadening of the market amid a hunt for new drivers.

Investors are selling AI giants to snap up smaller stocks and defensives that had lagged behind. That rotation coincides with the AI theme’s expansion to areas beyond chips and software, including the vast amounts of power and land the technology requires as well as what industries may eventually benefit from its implementation.

“Speculatively, we’ve seen some emergence of AI-related trades outside of tech and communications,” though those two groups still dominate, Gina Martin Adams, chief equity strategist for Bloomberg Intelligence, said in a recent webinar. Utilities saw a “bump in optimism in the second quarter related to the idea that AI would command more investment as well as ultimately result in stronger growth.”

While tech and communications remain the top two performers on the MSCI World Index year to date — up more than 14% each — they are the two worst performers so far this quarter. The two biggest gainers since the end of June have been real estate and utilities.

Here’s a look at the prospects for various sectors:
Power supply: The surge in the tech industry’s electricity demand is outstripping the available supply in many parts of the world. The International Energy Agency estimates usage by data centres, AI and cryptocurrency may double to more than 1,000 terawatt-hours in 2026 — roughly equivalent to the power consumption of Japan.

That’s put focus on utilities around the world, from Dominion Energy Inc and Southern Co in the US to Southeast Asia’s YTL Power International Bhd and Gulf Energy Development PCL.

“We believe that the wide adoption of AI could be a game changer for the power generation industry,” said Evgenia Molotova, a senior investment manager at Pictet Asset Management Ltd. “Depending on the rate of adoption, AI can require data centre buildout of two-to-three times the current size of the data centre industry by 2030.”
Equipment: Transformers — equipment that help deliver electricity from the generator to the user — are in such shortage that if you order one today, you will be lucky to receive it in 2028, according to Ken Liu, a China utilities analyst at UBS Group AG.

That’s boosted shares of top transformer makers this year, including General Electric Co., France’s Schneider Electric SE and Japan’s Hitachi Ltd.

“Energy infrastructure will be a very big theme, and that was even before artificial intelligence, which only adds to the need for more energy consumption,” said Philipp Baertschi, chief investment officer at Bank J Safra Sarasin AG. “There will be very good opportunities. Yet one needs to know that these are very cyclical, and there’s a lot of volatility.”
Renewables: The dramatic increase in power usage also raises the spectre of increased pollution, drawing attention to renewable energy shares. Companies involved in solar, hydro, wind and nuclear power have all been mentioned as potential beneficiaries.

China has led the way in terms of the percentage of alternative energy added annually to its national grid, noted Chris Liu, senior portfolio manager at Invesco Ltd. While the nation’s 90% share of global solar cell production is caught in the US and Europe’s tariff crosshairs, hydro stocks including China Yangtze Power Co and Sichuan Chuantou Energy Co could see investor attention rise.

The AI angle has also put a spotlight on alternative-energy stocks in other regions, from Dutch turbine maker Vestas Wind Systems A/S to South Korean hydrogen-related firm Doosan Fuel Cell Co.
Copper: Even commodities have an AI trade, with copper a key material in electric cables as well as heat exchangers that help cool data centres. Related stocks include Freeport-McMoRan Inc, BHP Group Ltd and China’s Jiangxi Copper Co.

“Global copper consumption is likely to be 2mn tonnes higher by 2030, with over half from the US, as power-hungry AI fuels data-centre capacity growth,” said Bloomberg Intelligence analyst Grant Sporre.
Data centres: Data centres are a play on the need for land to host computing facilities that are close to both power sources and major AI customers. Leading real estate investment trusts that specialize in the field include Equinix Inc, Digital Realty Trust Inc and Singapore-based Keppel DC REIT. Shares of Australian property firm Goodman Group have climbed about 35% this year on the AI boost.

Southeast Asia is seen as a rising AI hotspot, and local telecommunications firms like Telekom Malaysia Bhd and Advanced Info Service PCL in Thailand are looking to data centers as a new growth engine. Philippine telecom PLDT Inc is seeking a valuation of over $1bn for its data centre portfolio as it weighs a partial sale or REIT listing.
End users: Beyond the megacap AI “enablers” and lesser known pick-and-shovel names, some market strategists are focusing on the companies that stand to gain by implementing the technology to improve their businesses.

Morgan Stanley estimates shares of these “adopters” will see an average boost of 27% this year as resulting productivity gains help lift their results. It sees industrials as one of the sectors benefiting the most.

“If you look at the largest market-cap names, it would be companies like Deere & Co, which is leveraging the information that’s coming off agricultural equipment to optimise farming,” said Katy Huberty, Morgan Stanley’s global director of research. She also highlights Paccar Inc, which designs and manufactures large commercial trucks.

AI’s ability to analyse large, complicated data sets efficiently is also seen as a boon to the health-care industry, particularly in helping accelerate the drug-development process. Scott Schoenhaus, a healthcare technology analyst at KeyBanc Capital Markets Inc, recommends smaller biotech stocks including Recursion Pharmaceuticals Inc. and Schrodinger Inc on this idea.