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Tech Diffusion, Longevity, The Future of Energy and Investing for a Multipolar World are four key themes the Morgan Stanley Research team believes will shape industries, define investment decisions and transform economies. Jitania Kandhari shares her thoughts on how to unlock AI alpha across markets and industries.”
Technology diffusion—the process through which new technologies are adopted across broader populations over time—is a powerful force that Morgan Stanley sees reshaping industries, driving capital allocation and redefining economies and risk assets globally. Among technological advances, we believe AI could prove more transformational to global productivity and growth than even the internet or mobile phone—potentially creating a $40 trillion total addressable market.
This figure reflects not only new products and services but also operational efficiencies on a global scale. We’re only in the early innings of a major investment cycle. As AI proliferates across sectors, productivity gains and cost savings could drive trillions in value creation. Capital expenditure (capex) on AI infrastructure alone could exceed $3 trillion over the next three years.
Nations are racing to gain geopolitical and economic advantage. The U.S. is investing heavily in AI infrastructure and enterprise applications. China, with its deeply digitized economy, is focused on consumer-facing applications. Meanwhile, AI is influencing capital markets, with M&A activity likely to increase as firms reposition around the technology.
West versus East: Two distinct AI ecosystems
From a top-down perspective, we believe much of the trade war is also a tech war. AI’s complex hardware and infrastructure rely on intricate, globally interdependent supply chains—making geopolitical awareness essential for investors.
We see two distinct AI ecosystems emerging. Western companies are advancing rapidly in foundational models, such as GPT-4, Claude 2 and Gemini. China, meanwhile, is gaining ground in applied, consumer applications of AI—from AI shopping tools to voice technologies like WeChat and Ernie Bot. These divergent tracks offer differentiated opportunities across U.S. and international markets.
While AI shares similarities with other tech waves, like the internet or smartphones, there are key differences. Capex is exponentially higher, adoption is happening faster, and alpha generation now depends on nimble, real-time investment decisions.
Just as electricity and the internet became ubiquitous, we believe AI will follow suit. But the biggest winners won’t necessarily be the AI creators. Investors must look across the value chain—focusing on the companies and sectors effectively integrating AI into their operations and customer experience. Successful portfolios will reflect a global, full-spectrum approach.”
AI investment opportunities
AI is spreading more rapidly (diffusing), with funding flowing in from both companies enabling AI and those developing foundational models. All companies are focused on scaling to grow and expand their reach.
We see AI investment opportunities emerging in three key areas: business to business (B2B), consumer platforms and physical systems. In the B2B space, we’re focused on companies that already control core workflows and have access to proprietary data. These are the incumbents—Enterprise Resource Planning (ERP) software providers, cybersecurity platforms, horizontal stacks—that are now layering AI on top of what they already do well. They have the customer trust, the embedded distribution and the data advantage. In particular, cybersecurity stands out. As data volumes grow, so do the attack surfaces. AI-driven threat detection isn’t optional anymore—it’s foundational.
Beyond the horizontal players, we’re also focusing on vertical leaders—companies that dominate a specific industry and are positioned to leverage AI in a targeted, operational way. Here, we’re asking: Who are the leaders in health care, real estate or industrial automation that are positioned to integrate AI into domain-specific solutions?
On the consumer side, we are looking for leaders in entertainment, travel, music, gaming and media industries. These companies already have search, shopping and behavioral data they can leverage to create AI-driven, personalized customer experiences and monetize behavior.
Finally, there’s the physical layer. AI is being embedded into real-world systems, such as autonomous vehicles, industrial robotics and defense technology. These are capital-intensive plays with longer cycles, but also long-term potential. Europe and Japan, with strong industrial legacies, are especially interesting markets here. Embedded intelligence—where software meets hardware—is an especially attractive area of AI.
We continue to evaluate where AI is gaining real traction and look for those companies that are embedding AI into workflows, systems and experiences in a way that scales.
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