Skip to Main Content

How AI Will Power the Next Industrial Revolution

Artificial intelligence is taking the world by storm. In this article, Malcolm White and Jeremy Yeung, Directors & Portfolio Managers, Global Equity, BMO Asset Management, place artificial intelligence within the history of innovation, discuss the many ways it could change how we live and work, and explain how that could translate into attractive investment opportunities.

August 2023

Malcolm White

CFA, Portfolio Manager, Global Equity

Read bio

Jeremy Yeung

Portfolio Manager, Global Equity

Read bio

The next industrial revolution?

It is our belief that artificial intelligence (AI)—computer systems so powerful that they can perform tasks that had previously required human intelligence—will power the next industrial revolution. Given the recent and rapid surge in interest and news coverage of AI, this is likely not the first time you’ve heard such a bold statement. In our view, however, it isn’t hyperbole. Rather, it is a thesis that is justified by a close examination of AI’s development history, established capabilities, and trajectory.

In order to comprehend the magnitude of the societal changes promised by AI, it is worth revisiting another era of immense transformation: the turn of the twentieth century, which saw the introduction of several important technological innovations, including electricity, the automobile, and the telephone. That period showed how technology could fundamentally alter the world in which we live and work—and create billions in shareholder value in the process.

Nearly a century later came the digital revolution. Analysts predicted that communication innovations like the internet and mobile phones would change the world. They did, of course—but as the Dot-com bubble demonstrated to investors, this kind of growth doesn’t necessarily happen in a straight line.

AI is next in that line of world-altering megatrends. Let us explain.

Why AI, and why now?

As any science-fiction fan will tell you, the concept of AI has existed for decades. What happened, then, to propel it to its current status as arguably the most-hyped and fastest-adopted technology of all time?

ChatGPT, which took the world by storm in late 2022, was not the start of AI but rather the culmination of years of mostly off-the-radar research. Prior to the 2010s, progress was slow because of a lack of data and computing power. The breakthrough came in 2012, when researchers at the University of Toronto led by Geoffrey Hinton—now sometimes known as the ‘Godfather of AI’—used a technique called Deep Learning, which simulates how the human brain works by using math functions in place of neurons, to improve image recognition algorithms. Suppose, for instance, you input an image of a cat. Before 2012, computers could only accurately identify it as a cat about 75% of the time, compared to 95% accuracy for human beings. After this breakthrough, however, the accuracy skyrocketed to 96%—even better than humans. The proverbial Rubicon had been crossed, and for their efforts, Hinton and some of his colleagues won the Turing Award, which is considered the Nobel Prize of the computing world.

Image recognition is one thing. Language processing is something else. In order to generate passable, human-esque language, hundreds of billions of parameters (math functions) were needed, compared to the hundreds of millions available only a decade earlier. When that bar was finally cleared, the result was ChatGPT. Suddenly, AI was capable of doing things that were once exclusively the domain of humans—writing essays, generating useful computer code, and even passing a Wharton MBA exam. ChatGPT quickly became the fastest-adopted technology in history, with 100 million users in only two months. (This mark has since been surpassed only by Meta’s Threads microblogging app, which benefitted from users’ ability to sign up with their existing Instagram accounts.)

There’s no question that the tone of discussions about AI has changed over the past several months. We’ve been attending tech-related conferences for years, and prior to 2023, cryptocurrency was the hottest topic. Not so anymore. At a conference we attended in June, every single presentation mentioned some sort of application of AI. It’s already clear that 2023 will be seen by history as artificial intelligence technology’s debutante ball, and understandably, investors are asking—what is this, and how can we get exposure to it?

Source: Visual Capitalist.

The significance of AI for investors

Simply put, the rise of AI will likely generate billions of dollars in market capitalization for existing companies over the next decade, as well as new and significant initial public offerings (IPOs). Through the BMO Global Innovators Fund, BMO Global Asset Management intends to be a leading investor in that AI revolution.

This is a tectonic shift in computing. In 2007, Apple’s introduction of the iPhone ushered in a decade of infrastructure-building, including data centres, mobile infrastructure, and the cloud. The iPhone drove the wider adoption of 4G broadband technology, and its App Store led to the birth or growth of trillions of dollars’ worth of sharing economy companies, including Amazon, Uber, Airbnb, Meta, and Netflix. The 2020s, similarly, are poised to be the breakout decade for AI, leveraging infrastructure that is already in place. As with the sharing economy, investment opportunities start with hardware companies like Nvidia and AMD, which have already seen their valuations skyrocket. Next will come the cloud computing companies, and then the software and applications that will be the predominant foundations of this boom; ChatGPT has already given us a modest preview of their potential. It is not an overstatement to say that investing in AI is a potentially trillion-dollar opportunity.1 When Nvidia announced their Q1 earnings—$11 billion in revenue versus a $7 billion estimate—that was the iPhone moment, and there’s no turning back now.

It is not an overstatement to say that investing in AI is a potentially trillion-dollar opportunity.

Misconceptions and the AI value proposition

In only a few short months, the general public has become very familiar with ChatGPT. But common misconceptions remain about AI’s broader capabilities—and how it could possibly lead to trillions in earnings and GDP growth.

AI has a much wider range of applications than most people perceive. It is already proficient in language generation, image generation and recognition, reinforcement learning (feedback-based decision-making), and time series prediction (using past data to forecast future values). Where its primary value lies, however, is as a productivity booster. Across virtually every type of business, AI helps improve efficiency and increases return on investment (ROI) by enabling users to delegate time-consuming, repetitive, or unenjoyable tasks.2 Potential uses include:

  • Marketing: Automating processes like buying ad space; using image and scripting tools to push out ad copy across multiple platforms.
  • Legal & accounting: Using language capabilities to automate document-creation and paperwork processes.
  • Civil engineering: Finding efficiencies in the design and construction processes for projects like buildings and bridges; helping to intelligently carry out repetitive tasks like laying down train tracks; filling in the productivity gap as older engineers retire.
  • Computing: Using copilots (AI assistants) to create documents, improve search results, or write code based on simple language prompts; Microsoft will be integrating copilot functionality directly into future versions of Windows.
  • Medicine: Automatically sequencing billions of proteins, which would take humans millennia to do, in order to develop new treatments.
  • Energy: Accelerating research and development on fusion technologies, which have the potential to produce virtually limitless amounts of clean energy and help solve the climate crisis.

These examples are just the tip of the iceberg. If AI continues to advance at its current rate, we predict that within two-to-three years, we’ll have what we call ‘ME TV’—a user will be able to type in a simple prompt like “create a custom rock video with me playing the guitar,” and using text-to-video capabilities, AI-generated images, and so on, the AI will be able to create a full-fledged music video. This relatively frivolous example aside, it’s not difficult to see how this type of technology could have wide-reaching applications for businesses.

Across virtually every type of business, AI helps improve efficiency and increases return on investment (ROI) by enabling users to delegate time-consuming, repetitive, or unenjoyable tasks.

AI: Boom or bubble?

It’s enticing for investors, especially those who experienced the Dot-com crash, to ask the question—is AI a real boom or just a temporary bubble? In innovation investing, which has been our area of specialization for years, we often contend with these kinds of hype cycles, which frequently pass through a period of disillusionment before eventually coming out on the other side, sometimes years later. That was the trajectory of the Dot-com cycle: valuations shot up before crashing dramatically, and investors had to wait nearly a decade before the promise of emergent technologies was realized.

In our view, the Dot-com bubble isn’t a great comparison for AI. In that instance, the crash was a function of how long it took for the commercial implementation of new technologies to take effect. There won’t be that kind of decade-long gap with AI, because the necessary infrastructure has already been built up.

As the graph below illustrates, the innovation investing cycle can be broadly divided into two periods: hype and commercialization.

AI: Boom or bubble?
Source: BMO Global Asset Management. For illustrative purposes only.


Unlike Dot-coms, which spent years in the hype part of the curve, AI is already in the commercialization phase. Because of the computing power required to run AI applications, companies can’t afford to give them away to users, ChatGPT being a rare exception. As a result, they’re being immediately monetized under a subscription model, with the value far outstripping the cost—for a monthly fee of $20, for instance, a coder may be able to increase their productivity by 50%. In terms of ROI, that’s a no-brainer.

The Skynet question – A cautionary note

Remember the ‘Godfather of AI,’ Geoffrey Hinton? He recently made headlines by resigning from his position at Google and, on his way out, warning about the growing dangers of AI, stating: “Given the rate of progress, we expect things to get better quite fast. So, we need to worry about that.”3 This is a concern we hear often from investors. Is research progressing too quickly? Are we on the verge of Skynet, the world-destroying AI from the Terminator film franchise? The short answer to the Skynet question is no, but people like Hinton do raise legitimate concerns; after all, if AI can dramatically increase productivity in the workplace or lead to huge breakthroughs in the medical field, it could also be used for nefarious purposes by governments, militaries, and extra-state actors. Like all technologies, it attracts both the good and the bad.

We are already seeing some of these issues begin to materialize. Advances in AI have awoken regulators, and those debates will be ongoing. ‘Deep fakes’—realistic, AI-generated images of people and situations—are already ubiquitous in certain corners of the internet. For now, we generally assume that everything we see is real; in the near future, we’re likely to believe that everything is fake unless proven otherwise. There is also the potential for fraud, as well as the more mundane danger of inflated valuations for companies that don’t live up to their AI-related promise.

The AI industry is acutely aware of these risks. Unlike the big data era, which saw regulators react lethargically while companies flagrantly violated data privacy rules in the rush to participate in the land grab of information, the ESG experience with AI has been different. The industry has proactively created self-regulating ethics organizations to address concerns and regulators have been quicker to respond this time around. The RI team at BMO GAM is also actively working to understand and anticipate what regulatory oversight will be necessary in this new world.

The reality is that AI is a type of technology that is unprecedented in the history of humanity; we’ve never been able to replicate and automate human intelligence to this degree. Concerns like those of Hinton are well-founded, and as a society, we’ll have to work through them. As an investment opportunity, however, it is also unparalleled; the commercialization of AI is underway, and many companies are already working on authentication technology to combat deep fakes. With more monetization angles being developed and more technological developments to come, our final word for investors is this: stay tuned.

Please contact your BMO Global Asset Management wholesaler for any support and guidance.

Disclosures:

FOR ADVISOR USE ONLY. No portion of this communication may be reproduced or distributed to clients as it may not comply with Sales Communications requirements.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

All figures and statements are as of month end unless otherwise indicated. Performance is calculated before the deduction of management fees. Past performance is no guarantee of future results.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

Follow BMO

“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.

Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.

Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.

Legal and regulatory disclosures

This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.