The monthly realized volatility for Nasdaq 100 over the past 40 years has been 26 per cent in October, compared with an average of 22 per cent in other months. Given ongoing geopolitical uncertainty and the risks around export controls, the firm expects increased volatility for technology stocks in the near term. However, the Swiss firm is constructive on the broader tech sector as well as the AI story, believing that volatility should be utilized to build long-term AI exposure.

While their investment case for AI in public markets remains intact, UBS WM also thinks there are interesting diversification opportunities through private markets due to broadening AI adoption and spending trends. In particular, it sees broad-based private AI opportunities in venture capital, private equity, and real assets, with a focus on large language models, software applications, and data centers.

UBS highlighted how the launch of ChatGPT in 2022 proved to be an inflection point for the adoption of AI, much like the Netscape browser was for the internet , or the iPhone for the smart device industry. These events have resulted in an explosion of investor wealth. The market cap for the publicly-listed tech-heavy Nasdaq index continues to soar while private markets have witnessed exponential growth in tech unicorns and funding, the Swiss wealth manager added.

Given their view that the AI theme is still in its early days with more signs of broadening demand and spending trends, they see investment opportunities ahead.

“The AI trend is a prime example, where private markets, and venture capital in particular, offer investors a unique opportunity to capitalize on long-term disruptive innovation, which complements public markets as some companies choose to stay private for longer,” Laeticia Friedemann, alternative investment strategist at UBS Global Wealth Management, said.

“With broadening AI trends, diversified exposure through both public and private markets is how investors should best play and gain long-term exposure to this structural AI trend," Sundeep Gantori, equity strategist at UBS Global Wealth Management, added.

In public markets, UBS’s AI portfolio gives exposure to publicly listed AI companies that offer strong scale, margin, balance sheets, and execution advantages. At the other end of the spectrum, companies in venture capital and private equity provide access to breakthrough innovation and strong long-term potential, while digital infrastructure offers an opportunity to invest in more stable assets that provide the building blocks for the AI revolution, the firm said.

“While venture capital firms invest in innovative – but often unprofitable – startups that are at the forefront of AI intelligence and development, private equity managers tend to invest in mature companies with proven applications and established revenues,” the Swiss wealth manager continued. “Real asset funds – be it infrastructure or real estate – focus on the underlying technologies and systems that enable AI development, such as data centers, cloud computing, telecommunications, but also electricity generation,” the firm added.

Although private market activity has slowed down since the interest rate hike cycle initiated by major central banks in the first half of 2022, data for the first half of 2024 points to a stabilization. The beginning of the US Federal Reserve interest rate-cutting cycle should solidify the recovery, in their view.

Wrapping up, Mark Haefele, chief Investment officer at UBS Global Wealth Management, said: “We continue to favor the semiconductor space and megacaps for AI exposure, and recommend investors consider structured strategies or a buy-the-dip approach for quality AI stocks. For investors willing and able to manage risks such as illiquidity, we see broad-based AI opportunities in private markets with a focus on large language models, software applications, and data centers.”