Insights

Chart shows percentage of analysts responding to the question.
Source: Fidelity International, January 2025.

“AI remains more of a buzzword than a profit driver at the moment,” says Evan Delaney, a telecoms, media and technology fixed income analyst focusing on North America. Yet he does expect AI will have a moderately positive impact on his companies’ profitability this year, thanks largely to an automation of call centres and other customer service activity using the technology.

Back-office activities and customer service functions dominate the examples Fidelity’s analysts give of how the companies they talk to are currently using AI.

Chart 2: How are companies using AI?

Which parts of your companies are seeing material benefits from the use of AI?

Chart shows percentage of analysts responding to the question.
Source: Fidelity International, January 2025.

“Automation is already widely used on assembly lines, but there’s little application of AI,” says Alan Zhou, a fixed income analyst covering the Asian automotive sector. “AI may be useful at the R&D stage to speed up product development, but so far that does not seem to be the case.”

This focus on automation hints at the pivot to robotics some tech companies are making as AI starts to mature. Reggie Pan, a China-focused analyst who covers the industrial sector, cites automation as the main use case for AI among his companies.

Andrew Hall, an equity analyst who covers North American grocers and convenience stores, says his companies are using AI mostly to optimize promotions and price setting. But, he adds, there’s little evidence of a material change in effectiveness.

Another consumer staples analyst, Louis Lee, says that the Asean companies he covers have little use for AI because of the region’s low labour costs. Sam Heithersay, who covers Australian metals and mining firms, says some of them are using AI to improve mine productivity and electricity grid use, but it’s still in its infancy.

Interestingly, more analysts expect their companies will spend more on AI this year than expect them to materially increase their use of the technology. One interpretation is that software vendors are bundling unloved AI features into existing products and then using the extra features to justify a price hike. The cliché about picks and shovels comes to mind: many gold rush prospectors came away empty-handed, no matter how impressive their newly bought tools might have been. Perhaps the most successful AI use case so far is channelling money into the coffers of tech companies.

Chart 4: AI costs expected to outpace usage

Do you expect your companies to materially increase their use of/spend on AI over the next 12 months?

Chart shows percentage of analysts responding to the questions “Do you expect your companies to materially increase their use of AI over the next 12 months?” and “Do you expect your companies to increase their spend on AI over the next 12 months?”
Sources: Fidelity International, January 2025.

Another interpretation for expected spending outstripping use in 2025 is research and development. Unsurprisingly, it’s IT, financials and communication services companies that are making the biggest AI bets, as things stand.

Indeed, we manage a team here at Fidelity that is working on several AI solutions to improve the speed and quality of insight generation, such as using the technology to build simpler models, to generate assessments of companies ahead of doing fundamental research and to help analyze company results. The aim is both to complement our own work with ideas from the public arena and, more importantly, to make the most of our time with companies, their customers and their competitors.

Chart 5: Tech, financials and others making big bets on AI

Do you expect your companies to materially increase their use of/spend on AI over the next 12 months?

Chart shows percentage of analysts responding to the questions “Do you expect your companies to materially increase their use of AI over the next 12 months?” and “Do you expect your companies to increase their spend on AI over the next 12 months?”
Source: Fidelity International, January 2025.

Investors will need to be patient for AI’s impact.

A lot more analysts expect AI will have a positive impact on companies’ profitability over a five-year horizon, compared to their more neutral expectations for the next 12 months.

As for how the technology will be used, the biggest potential over the next five years appears to be in the health care and financial sectors, via use cases like medical imaging, streamlining drug development and sales processes, originating loans, credit scoring, software improvements and those ubiquitous back-office and call centre applications.

Chart 6: Give it time.

What impact, if any, do you expect AI will have on your companies’ profitability over the next five years?

Chart shows percentage of analysts responding to the question.
Source: Fidelity International, January 2025.

In the meantime, investors waiting to see big breakthroughs in AI adoption and killer use cases will need to wait. The question is, will they have the patience?

Tech tailwinds

The AI hype has been one of the big drivers of the surge in technology shares over the past 12 months, and a failure of the sector’s next big thing to live up to its vaunted promises would weaken the case for further gains. For now, however, there seems to be juice left in the tech orange.

“Tech has had a strong year, and at this stage I don’t see a strong valuation de-rating catalyst,” says Clare Coleman, an equity analyst who covers software and internet companies across Asia-Pacific outside of China and Japan. “However, maintaining current earnings momentum and delivering on consensus expectations will be pivotal. The sector is expensive as a whole, but there are still companies with such strong structural growth that they will outpace more modest market growth, and the risk-reward is still fair.”

Investors will need to be especially selective when deploying money into those sectors showing most promise for AI longer-term given the divergence in valuations.

Chart 7: Divergent valuations

Looking at valuations as we head into 2025, would you say the disparity in valuations among your companies is high, medium or low?

Chart shows percentage of analysts responding to “High” to the question.
Source: Fidelity International, January 2025.

Overall, more than a quarter of analysts (28%) say there is a high disparity in valuations among their companies right now. Health care and tech have the highest proportion of analysts who see a wide divergence in valuations.

“There’s very high disparity between high- and low-quality names,” says Matthew Bowles, an information technology sector equity analyst with a focus on the E.U. “It’s still difficult for small caps, as most end markets are weak or still correcting after COVID.”

Keep in mind too our analysts’ view that there are many factors that will impact firms’ profitability this year, and that AI does not look set to be the dominant one yet.

***

Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.

For institutional use only.

This document is for investment professionals only and should not be relied on by private investors.

This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without the prior permission of Fidelity.

This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorized or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.

This communication is not directed at and must not be acted on by persons inside the U.S. and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorized for distribution or where no such authorization is required. Fidelity is not authorized to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisors.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.

Past performance is not a reliable indicator of future results.

This document may contain materials from third parties which are supplied by companies that are not affiliated with any Fidelity entity (third-party content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.

These materials may contain statements that are “forward-looking statements,” which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Fidelity Investments Canada ULC (“FIC”) does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed by FIC when developing forward-looking statements. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.