Key Takeaways
- UK fund managers are digging deeper to gain AI exposure beyond marquee technology companies with direct AI involvement.
- Artificial intelligence is a growing part of UK industrials earnings, with Halma, Hill & Smith and Diploma all playing a part in the supply chain.
- Domestic AI exposure also extends into private markets, where the UK has considerable heritage in fostering AI startups.
With technology companies making up less than 1% of the Morningstar UK Index, it may be easy to overlook UK stocks as a way to gain exposure to the AI theme.
Away from Arm Holdings, AI and semiconductor “pure plays” are few and far between. Fund managers such as Rathbones director of equities Alexandra Jackson are now looking toward the UK’s FTSE 100 and FTSE 250 “picks and shovel” stocks which provide the tools and equipment for the buildout of data centers.
These stocks, which haven’t rallied as much as those in the US and Europe, may benefit as the AI investment cycle moves beyond computational power to the physical economy, she says.
Industrials companies such as FTSE 250 stock Hill & Smith HILS, and FTSE 100 stocks Diploma DPLM, and Halma HLMA provide tools and services for the AI supply chain. They’ve all been on the rise this year: Hill & Smith and Diploma share prices are up more than 30% in the year to date, while Halma stock is more than 10% higher.
Jackson, who manages the Rathbone UK Opportunities Fund, says that AI exposure is a small but growing part of these FTSE businesses. While their stocks haven’t hit the same heights as AI-related stocks in other markets, they have a level of protection built in should the AI trade unravel.
“The companies we have here that are playing to the AI theme are not pure plays,” says Jackson. “They’re the picks and shovels so they sit at a different place in the ecosystem, by providing either physical infrastructure or connectors.”
If the AI rally does run out of steam, these stocks are less likely to fall dramatically than some of the more obvious US tech winners, she adds.
Safety technology group Halma, which is in the FTSE 100, has seen its photonics technology division surge following demand for its optical switches—a key component in data centers—from a cloud services giant, or “hyperscaler.”
“Halma is one of our best AI plays,” Jackson says. “Roughly a quarter of the business is directly AI-related. If the AI trade rolls over there is still 75% of the business left over which is doing what Halma has always done.”
Shares fell as much as 15% on June 11 following the release of Halma’s full-year results, which showed momentum in the photonics division may slow after sales grew 52% over the last year.
Following the results, Morningstar equity analyst Matthew Donen said “the equity story is increasingly reliant on the photonics business, a function of its rapid growth, which creates customer concentration risk.
”However, Halma’s portfolio of niche businesses with leading market shares enjoys strong pricing power and switching costs, giving the stock a narrow economic moat rating, according to Donen.
FTSE 250 stock Oxford Instruments OXIG provides cooling systems and semiconductor fabrication equipment for data centers. Shares are up 44% so far this year.
“It’s not a chip manufacturer or a hyperscaler,” says Rathbones’ Jackson, “but you can’t build a semiconductor factory without these etch and deposition plasma tools.”
“It’s not a huge part of the overall business, but it’s definitely generating the interest,” she says. “The fact that it’s not huge also means it’s never going to be a full AI play, so there’s a limited impact it can have on earnings. Still, it’s a nice flip on the earnings side and massively supportive to the valuation.”
How to Access the UK AI Theme via Private Markets
UK AI exposure also extends into private markets, where the UK has considerable heritage in fostering AI startups.
Paul Roberts, UK equities investment specialist at Baillie Gifford, says autonomous driving technology firm Wayve is emerging as one of the UK’s most promising advanced technology companies.
The private company is held in the Baillie Gifford UK Growth Trust BGUK and the Schiehallion Fund MNTN, which built up a stake in SpaceX SPCX before the company floated.
Wayve develops AI software for autonomous vehicles, though Roberts says the ambition extends beyond cars.
“Wayve wants to build a general-purpose platform for embodied AI: intelligence that can operate in the physical world across vehicles, robotics, logistics and manufacturing,” he says.
“Commercially, it has moved beyond being a research-led startup, securing backing and partnerships from major global players including Uber, Nissan, Mercedes-Benz, Stellantis, Nvidia and Microsoft,” Roberts adds. “Uber is expected to be an important route to market, with Wayve-powered robotaxi trials planned in London and Tokyo in 2026, and an ambition to expand into more than 10 markets globally.”
While the UK lacks a large tech footprint in public markets, there are British businesses with significant AI exposure. With a market capitalization of USD 450 billion, chip designer Arm Holdings ARM, is the most valuable UK company. When it went public for a second time in 2023, the Cambridge-based company chose to list in New York, having previously been on the London Stock Exchange from 1998 to 2016.
