This Industry Insight is commercial content produced in partnership with Commonwealth Private.
For much of the past five years, making money in markets required little more than holding a US-indexed fund.
A narrow group of mega-cap technology firms, buoyed by advertising, cloud and semiconductor revenues, delivered extraordinary returns. Their dominance created the illusion that exposure alone was a strategy.
That scattershot era – when the gains made it easy to mistake momentum for method – is ending. The next phase of investing will be more complex, more selective and more active.
Gains will depend less on being exposed to technology and more on understanding which companies can convert the promise of artificial intelligence into real productivity.
The future of AI will hinge on the dynamic between enablers – the cloud, software and semiconductor giants – and adopters – the businesses deploying these tools. Enablers can only sustain their momentum once adopters begin translating AI into measurable productivity gains.
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James Foot, chief investment officer, Commonwealth Private.
At some point, the fortunes of both groups must converge.
That convergence could come from adopters catching up as monetisation takes hold or from enablers catching down if it doesn’t. Either way, the next five years are unlikely to resemble the last.
Capital expenditure on AI infrastructure has exploded and that spending now needs to justify itself. Markets are already pricing in successful monetisation at scale which means that disappointment will trigger sharp repricing.
As the funding model shifts from equity to debt, timeframes tighten. The industry no longer has a decade to prove itself which means that evidence of a return on investment must start appearing soon - most likely within the next three years.
As with smartphones, it will take time for the full range of applications to emerge, but once they do, the impact will compound quickly. Like most revolutions, when change finally arrives, it tends to happen gradually, then all at once.
Winners and losers
Productivity gains from AI are likely to appear unevenly across industries. Professional services firms – accountants, lawyers, consultants and financial institutions – are early adopters, helped by structured data and repeatable processes. But even here, most implementations remain in pilot mode.
The path forward won’t be linear and investors can expect setbacks, corrections and bursts of volatility. Each correction will create openings for investors who stay focused on fundamentals rather than headlines.
If AI does deliver broad-based benefits, two types of companies will emerge: those with pricing power and those with strong competitive moats will use AI to deepen their advantages and expand margins.
In highly competitive sectors such as retail, logistics and consumer electronics, AI adopters will also need to spend, but the efficiency gains they achieve are expected to be passed on to customers through lower prices.
Knowing which is which will be crucial.
The coming decade will favour investors who analyse competitive positioning and cashflow, not just exposure to fashionable themes.
Every technological revolution follows its own capital cycle. The dotcom boom showed how exuberance can get ahead of economics. While the current AI wave may be better funded and more grounded, the parallels are worth noting.
The search term “AI bubble” has surged online lately, suggesting investors are at least asking the right questions. Markets are safest when participants disagree; danger follows when consensus becomes absolute.
Australian firms are adopting AI much like their global peers. Professional services, logistics and finance lead the way, using it to cut costs, improve service and raise quality. The use cases, in terms of inventory control, supply-chain planning, customer personalisation, R&D acceleration, are becoming clearer by the month.
AI is fast becoming the ticket to compete. For companies, it will be essential to survival; for investors, the payoff will be far less uniform. Returns will depend on who captures value, not just who adopts the tools.
In this environment, passivity carries risk. The companies likely to benefit most from AI’s diffusion are likely to be less visible and underrepresented in global benchmark indices. Capturing their upside will require more active, engaged investing.
Valuation discipline, therefore, remains the investor’s best defence.
Finding real value
The world’s most admired technology firms will continue to matter, but not all will realise today’s expectations. Others, operating quietly behind the scenes, are building the infrastructure and processes most likely to turn theory into tangible productivity.
The opportunity lies in finding those firms early and being patient enough to let the benefits compound.
AI will not reshape markets overnight, but neither will it take a generation. Progress will come in bursts – advances, stumbles, adjustments – each bringing new risks and new opportunities.
For investors and business leaders alike, the task is to remain informed, flexible and realistic. The clock is already ticking for AI to prove its value.
James Foot is chief investment officer, Commonwealth Private.
