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CONTRIBUTORS

Kim Catechis

Investment Strategist, 
Franklin Templeton Institute

Karolina Kosinska, CIPM

Analyst
Franklin Templeton Institute

Preview

This is one of five papers from the full report—Consider This: The weaponisation of supply chains—exploring how key supply chains are evolving – and what it means for long-term investment strategy.

In this paper, we examine the infrastructure behind AI— and the growing pressure it faces. From export controls on advanced chips to rising energy demand in dates centres and the fragility of undersea cables, the risks are real—and rising.

While investors debate the implications for valuations of AI-related firms, the real-world risks of physical disruption loom. While semiconductors are a significant component of the AI supply chain, the broader implications of tariffs on related goods, such as electronics and data centre components that incorporate semiconductors, are also relevant. The inescapable conclusion is that tariffs can have indirect effects that lead to supply chain shortages for AI.

These vulnerabilities may not yet be fully priced in, but they could have far-reaching implications for markets and sectors. For investors, understanding the risks embedded in AI’s supply chain is becoming essential to assessing long-term resilience and opportunity.

Investors should be clear that the physical supply chain of AI cannot be taken for granted and should be considered a major risk factor, with knock-on effects on a wide variety of industrial supply chains.

WHAT ARE THE RISKS?

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Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.

An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.

Investment strategies that incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the information technology- and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.

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