Analysis: Europe stock pickers go old-school to ride the next wave in AI

VERBUND AG

22/05/2024 06:00

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      AI theme still a hot topic in Europe
    

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      Region's need for data centres in focus 
    

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      Utilities could benefit from higher power demand
    

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      Infotech firms adopting tech stand out
    

  
    By Lucy Raitano
       LONDON, May 22 (Reuters) - European stock pickers are
turning to more established sectors like utilities, professional
data providers and even copper miners to tap into the next wave
of the AI boom, a year after AI chipmaker Nvidia's  NVDA.O 
emergence as a driving force.
    Enthusiasm for artificial intelligence helped drive a rally
across equity markets in 2023, propelling Nvidia and Dutch
semiconductor equipment supplier ASML  ASML.AS  into the
spotlight.    
    Nvidia shares are hovering close to record highs ahead of
its quarterly earnings due late on Wednesday. However, some of
the sheen has rubbed off Europe's AI-linked megacaps, prompting
investors to seek out cheaper alternatives.
    Stock pickers are now looking at companies and sectors that
are likely to be long-term AI beneficiaries.
    "The first phase of AI was obviously chipmakers like Nvidia.
Then you’ve already seen the second wave move to the industrial
companies which actually supply the components to the data
centres," said Bernie Ahkong, CIO Global Multi-Strategy Alpha at
UBS O’Connor.
    "And now we’re just starting to get the third phase into
utility/power firms in the past several weeks."  
    
    FIRING UP THE DATA CENTRES   
    Data centres, which are essential to the rise of generative
AI, need huge amounts of energy and this is expected to surge as
demand for the centres accelerates.
    The International Energy Agency estimates total power
consumption from data centres will top 1,000 terawatt hours
(TWh) by 2026 - roughly what Japan consumes now - from 460 TWh
in 2022.
    "One of the most interesting ways within Europe to play AI
on a multi-year basis actually is via some of these utilities
companies," UBS O'Connor's Ahkong said.
    Demand for data centre space in Europe is also set to
outstrip delivery of new stock for the third straight year and
AI demand will exacerbate the issue, said Kevin Restivo, who
heads European data centre research at real estate services
provider CBRE.
    
    In the last five weeks, the utilities index  .SX6P  has 
risen over 9%, driven largely by expectations for interest rate
cuts, versus a 4.7% rise in the main STOXX 600  .STOXX  index.
But they are still lagging the rest of the market year-to-date,
up just 0.2% versus a 9% rise in the benchmark index.
    Bank of America said in a recent note European utilities
bosses are talking about AI, but upside potential from data
centres is "anecdotal at best".
    Even so, the bank says plenty of companies could benefit
from a boom in AI-linked power demand, from Fortum  FORTUM.HE ,
Verbund  VERB.VI  and renewables supplier EDP  EDP.LS , to
larger players like RWE  RWEG.DE , Iberdrola  IBE.MC , Enel
 ENEI.MI  and Engie  ENGIE.PA .
    
    
    ADOPTERS VERSUS ENABLERS 
    A year ago, investors had been jittery around the disruptive
potential of AI for anything from IT services to media,
education and consulting.
    "How I look at AI in the UK, the US has the enablers, we’ve
got the adopters," Trevor Green, head of UK equities for Aviva
Investors, said.    
    "When investors will get particularly interested is when we
can actually quantify this in revenue potential. The providers
are rightly still being a bit evasive on this as we are at such
an early stage of adoption," he said.
    He highlighted the London Stock Exchange  LSEG.L ,
information and analytics group RELX  REL.L  and software group
Sage  SGE.L  as examples of companies that have been working on
AI for years. 
    "Now we are properly starting to see revenue-generating
opportunities from it," he said.
    Marcel Stotzel, co-portfolio manager of Fidelity European
Fund and Fidelity European Trust, says a lot of the AI hype has
been around the big U.S. names behind the technology. 
    In the past year, shares in the likes of OpenAI backer
Microsoft  MSFT.O  and Alphabet's Google  GOOGL.O  have shot up
33%-41%. 
    Meanwhile, some European companies have been quietly using
AI to develop new products that are already benefiting their
customers, said Stotzel. 
    "This has resulted in the European-listed beneficiaries
trading at more attractive valuations," he said, listing German
software company SAP  SAPG.DE  and Swiss drugmaker Roche  ROG.S 
among those his team are focused on to play the AI theme.
    Miners are another area of investor interest, particularly
for copper  CMCU3 , which has hit record highs above $11,000 a
metric ton this week, spurred largely by a shortage of material
for prompt delivery.
    Commodity trader Trafigura believes copper demand linked to
data centres and AI could add up to one million tons by 2030 and
exacerbate supply deficits towards the end of the decade.
    "The copper boom is also part of the AI craze," Kathleen
Brooks, research director at trading platform XTB, said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
European utilities stocks stage comeback    https://reut.rs/44QOE7n
IEA electricity demand outlook    https://reut.rs/3V7MSvo
Enabler, adopter or beneficiary    https://reut.rs/3WKr3Dz
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Lucy Raitano; Editing by Amanda Cooper and Emelia
Sithole-Matarise)
 ((Lucy.Raitano@thomsonreuters.com;))