Asian Investors Seek AI 'Picks and Shovels' Amid Valuation Concerns

A growing sense of caution is tempering the artificial intelligence investment boom among major Asian investors, who are now prioritizing companies that facilitate the AI revolution and can withstand its disruptive force, rather than betting on the front-end applications alone.

While AI-related stocks have propelled global markets to record highs, leading fund managers speaking at the Reuters NEXT Asia event in Singapore highlighted increasing skepticism about sustaining the rapid pace of growth and achieving significant returns on massive infrastructure spending.

A Dual-Pronged Approach

Investors are navigating a complex landscape, aiming to capitalize on AI's potential while hedging against the risks it poses to traditional business models. Singapore state investor Temasek, for instance, is seeking to increase its AI exposure while simultaneously investing in businesses with "hard assets" that are less likely to be disrupted by the technology, according to Chief Investment Officer Rohit Sipahimalani.

Temasek, which holds stakes in Anthropic and OpenAI, plans to significantly boost its investment in AI-related companies. Key details from the firm include:

• A target to lift AI exposure from 6% of its portfolio to as much as 15% over the next five years.
• A strategy to invest across the entire value chain, distinguishing between areas with "froth" and those with "real cash flows."

Targeting the 'Picks and Shovels'

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With uncertainty surrounding which AI applications will ultimately dominate, some investors are focusing on the essential infrastructure that underpins the technology. This "picks and shovels" approach targets the foundational elements required for AI adoption.

Stephanie Hui, head of private and growth equity for Asia-Pacific at Goldman Sachs Asset Management, noted it is "way too early" to pick winning applications. Instead, her firm is investing in areas like liquid cooling and data centers. "We are going for the simple stuff that facilitates an end proxy for AI adoption," Hui said at the event.

Valuations and Over-Exuberance

Underlying this strategic shift are concerns about soaring valuations and a potential market bubble. Fred Hu, chairman of China’s Primavera Capital Group, cautioned against "over-exuberance," questioning how much capital inflow into AI is sustainable.

This sentiment was echoed by Satoshi Ueyama of Bain Capital Japan, who emphasized that for infrastructure investments to be viable, they require end-users. Ueyama stated that while "AI is real," some parts of the market are "over-excited." He added that his firm is focused on identifying AI-enabled winners in sectors like services and consumer applications, acknowledging that "not all AI investment is going to be successful at this stage."