As Shengshi Fund stated in their article, recently, the largest global manufacturer of artificial intelligence chips caused market fluctuations, leading to doubts about whether the investment frenzy in artificial intelligence has come to an end. With several recent reports highlighting the limitations and shortcomings of this technology, doubts regarding the economic benefits brought by the artificial intelligence revolution are increasing. On the contrary, expectations for artificial intelligence have peaked, even though there is no solid evidence yet to prove that this technology can improve productivity. More importantly, investors may be entering a period of disillusionment, but once the macroeconomic benefits start to show, these doubts will dissipate. Artificial Intelligence (AI) - an investment theme with significant growth potential From a market perspective, the recent initial retracement may be a "healthy breather" after the recent investment frenzy. Overall, it is not believed that artificial intelligence will become another technology bubble in the market. Analysis shows that the artificial intelligence investment theme has several years of sustainability and still has significant growth potential, even though the trajectory of artificial intelligence-related stocks may be somewhat unstable. Indeed, speculation about new technologies is more likely to be questioned due to their bubble-like characteristics, similar to the Internet bubble in the late 1990s. Although the artificial intelligence bubble may burst one day, it is not expected to happen in the short term. The current artificial intelligence bubble still has plenty of room to expand. At present, the valuation of U.S. artificial intelligence-related stocks remains high but reasonable, and it may further increase. Market optimism about artificial intelligence is likely to be revived, and it may further boost the U.S. stock market next year. An industrial revolution led by digitization, big data, and artificial intelligence Overall, artificial intelligence technology will significantly improve total factor productivity in almost all economies worldwide, although the progress and impact in each country may vary. It is even believed that the world is undergoing another industrial revolution led by digitization, big data, automation, and artificial intelligence. However, there may be a lag between technological development and its impact on overall productivity, as the benefits of these technologies take time to penetrate the economy. In addition, countries' infrastructure (including regulations and legal frameworks) must be adjusted to fully realize the potential of each new technology. Looking back, in the late 1980s and 1990s, the Information and Communication Technology (ICT) revolution, core technologies took about 10 years to gain a foothold in the market, and it was not until the mid-1990s that its impact became widespread. By the mid-1990s, ICT had driven productivity growth, leading to the U.S. economy growing at twice the pace of the 1980s. However, as shown in the graph, the lag between technology adoption has gradually shortened. Graph: Lag in technology adoption (years) Data source: Comin & Mestieri, 2018 Therefore, while it may take about 70 years for the steam engine to be universally adopted, history suggests that the adoption rate of artificial intelligence will be faster. There are signs that artificial intelligence has begun to drive increased capital expenditure investment by businesses, and there is a widespread belief that artificial intelligence could boost U.S. annual GDP growth by 1.5 percentage points over the next decade. Graph: Generative artificial intelligence is expected to drive productivity growth and GDP growth Data source: Macrobond, U.S. Bureau of Labor Statistics productivity database, and Shengshi Global Market Strategy Department Global impact of artificial intelligence The United States is undoubtedly leading the world, while Europe may not continue its impressive performance from the previous two technological revolutions. Many emerging markets are actively embracing cutting-edge technology. While the artificial intelligence investment frenzy sweeps the globe, the impact of artificial intelligence on developed markets may be more significant than on emerging markets, especially in terms of labor markets. This is because emerging markets have a younger population structure, more labor supply, lower capital intensity, less developed human capital, and economies primarily centered around manufacturing. Some data can also support this conclusion - the International Monetary Fund estimates that in developed economies, 60% of jobs could be affected by artificial intelligence, compared to 40% in emerging markets and 26% in low-income countries. Graph: Emerging and frontier markets face lower risks of unemployment due to artificial intelligence than developed markets Data source: International Monetary Fund, International Labour Organization, as of January 16, 2024. Graph: The correlation between employment in the service sector and ICT is lower in emerging markets than in developed markets, but markets like India and Latin America are clear exceptions Data source: International Monetary Fund, International Labour Organization, as of January 16, 2024. However, although the impact of artificial intelligence on emerging markets may be weaker, its significance may not be lower than in developed markets. Most of the human capital and research and development expenses related to artificial intelligence development are borne by developed market economies. This means that emerging markets can use artificial intelligence as a leapfrog development tool, adopting cutting-edge solutions while saving high technology development costs. Countries like India, Israel, South Korea, and China have already started adopting this strategy. Timely adoption of artificial intelligence, coupled with limited job loss risks, will position emerging market economies more favorably in the global technology landscape and significantly change current investment prospects. Nevertheless, the greatest opportunity to capture value lies with the adopters of artificial intelligence. The artificial intelligence value chain can be divided into three parts: supporting infrastructure, artificial intelligence architecture, and artificial intelligence adopters. Supporting infrastructure represents specialized hardware and platforms, artificial intelligence architecture refers to tools and systems for training and deployment, and artificial intelligence adopters represent businesses and functional departments that primarily use integrated artificial intelligence software applications. At present, the world may be in an intermediate stage between the first two components, and it is still unclear how artificial intelligence will be widely adopted and how it will change the long-term economic landscape. Investment insight - technology industry As mentioned earlier, it is currently the time of artificial intelligence.At the beginning of the era, the main drivers of the theme market come from the support infrastructure and artificial intelligence architecture, these two major components.Therefore, semiconductor, semiconductor equipment, large-scale data centers, and data infrastructure stocks have recently seen an uptrend. It is believed that these sectors will continue to be catalysts for the artificial intelligence market in developed and emerging market economies in the short term. Although market speculation suggests the possibility of a potential tech stock bubble as US tech giants soar to record levels, at least in the short term, this is unlikely to happen. The tech sector in developed markets is warming up but not overheated, as the P/E ratio of the "Big Seven" is close to 40 times, only half of the "Four Horsemen" (Dell, Microsoft, Intel, Cisco), whose P/E ratio exceeded 80 times during the tech bubble in the 2000s. The P/E ratio of the top six largest companies reached 64 times at one point. In addition, the strong earnings of tech companies provide support for the long-term bull market of artificial intelligence. The market recently experienced a healthy correction as investors reevaluated the long-term impact of innovative technologies, but this is not seen as a reason to abandon the artificial intelligence theme. On the contrary, this should lay the foundation for more sustainable growth in the tech industry. Given that related indicators show positive domestic demand for artificial intelligence infrastructure components in the US and other developed markets, focus remains on related sectors. Investment Insight - Emerging Markets In terms of emerging markets, the market environment in the second half of this year will be particularly favorable for stocks in China, Taiwan, and South Korea. The weight of the tech industry in the indices of these two markets is quite high. Although the valuation of AI-related stocks in Taiwan is not cheap, earnings are gradually improving, and we will continue to observe for buying opportunities in the event of a major market downturn. Recently, there has been a noticeable differentiation in the performance of the markets in Taiwan and South Korea. As of now, the Taiwan Weighted Stock Price Index has soared by 30%, while the Korean Composite Stock Price Index has performed poorly. Although both countries are leaders in global chip supply, Korean semiconductor companies have not enjoyed the AI premium that their Taiwanese counterparts have. This may be a good time to buy Korean tech stocks. Investment Insight - Long-term Capital Flows and Risk Factors In the long term, it is expected that funds will flow from equipment and infrastructure to the field of integrated AI software applications. Similar to the emergence of 4G, it is believed that with the continued rapid application of artificial intelligence, a new era of the economy based on AI applications will arise. However, it is important to remember that any new technology comes with risks. Given the powerful capabilities of artificial intelligence tools, unprecedented network security incidents may quickly arise. Therefore, the outlook for network security and information technology consulting services is positive.