Here's UBS' 4-part investing strategy to capitalize on the AI wave and drive gains in 2025

• AI is continuing on its journey to becoming a $1 trillion market by the end of the decade.
• UBS sees new ways to invest in AI as the technology develops more use cases.
• Here are 4 AI trades that the bank is bullish on going into the new year.

For UBS, a new year means a new AI investing playbook.

It's only been two years since the release of ChatGPT, but the pace of innovation in the AI space has been dizzying. Alphabet, Amazon, Meta, and Microsoft are on track to pour $222 billion into capital expenditures for AI by the end of this year.

UBS predicts that AI will become a trillion-dollar industry before the end of the decade. The technology has the potential to dramatically transform the economy, boosting productivity and lowering inflation.

"If AI's potential can be realized, we believe it could augur a productivity revolution, and contribute to lower prices for various goods and services and higher rates of economic growth," Mark Haefele, chief investment officer of UBS Global Wealth Management, wrote in the bank's 2025 outlook.

It's a tall order, but UBS is optimistic. More and more companies have come out with profit-driving use cases for AI, making it easier to measure the impact of AI on the economy. UBS predicts that industries such as healthcare, cybersecurity, and fintech in particular will see new revenue streams from AI.

Here are four ways to make sure your portfolio benefits from AI in 2025, according to UBS.

Adjust your allocation to AI

First, make sure your portfolio has enough exposure to AI. In an industry as fast-growing as AI, staying on top of your holdings is critical.

Of course, specific portfolio allocations will depend on individual risk tolerance. While the AI trade has helped push the S&P 500 to new highs this year and undoubtedly rewarded investors very handsomely, some investment strategists are concerned about the concentration risk associated with the dominance of the AI theme within portfolios. High valuations are also a concern for some, with a lot of future good news potentially already priced in.

But for those willing to take a bet on the emerging technology, take a look at your current AI holdings and adjust accordingly.

"We believe a neutral allocation to artificial intelligence would involve allocating around 25% of an equity portfolio to stocks with a high degree of exposure to the technology," Haefele said.

He added: "The sheer pace of growth in the industry means that investors who were underallocated before have become even more underallocated."

Invest in the enabling layer

It's a good idea to follow the money — specifically, the $222 billion Big Tech is spending to build out AI, Haefele said. The money is going to investments in AI chip companies, data centers, and cloud service providers, also known as the enabling layer of AI.

UBS recommends investing in the foundational AI infrastructure for the best combination of earnings growth and competitive advantage at a fair valuation.

"We favor the semiconductor companies that benefit from the current investment in AI infrastructure. This includes not only leading US fabless chip designers, but also Taiwanese foundries with a strong technological edge and limited substitution risk posed by competitors, enabling them to better mitigate any potential tariff hikes," UBS said.

Keep your eye out for other parts of the AI value chain, too. It's still too early to definitively declare winners in the application layer, which encompasses copilots, assistants, and customer service AI products. However, UBS predicts that more use cases will emerge in the next few years, leading to $396 billion of revenue opportunities in the application layer.

Invest in energy

AI is power-hungry, and it's spiking electricity demand. AI data centers are expected to increase their share of US electricity usage from 4% today to 9% by 2030. That's not to mention the additional demand stemming from cooling systems and energy-efficient equipment.

As a result, the power and utilities trade is another great way to get AI exposure. UBS recommends that investors capitalize on increased energy demand through a variety of avenues. First, the bank expects electrical grid infrastructure to be a growth area, as much of the existing grid is due for an upgrade. Demand for transition metals like copper and aluminum, which play key roles in electrical components and renewables, will also rise.

When it comes to investing in energy, go for quality companies, the bank said, as building out energy infrastructure is a time and capital-intensive process.

"Companies with strong financial health and competitive advantages in solar, wind, nuclear, and natural gas-hydrogen technologies should be prioritized," Haefele wrote.

Balance mega caps with new entrants

Big Tech has dominated the AI scene this year, as seen by their skyrocketing capital expenditures. Their size has helped them solidify their position as early winners of the AI revolution, as the technology is not cheap to build. UBS predicts that the AI landscape is trending toward "an oligopoly of vertically integrated 'foundries' and monolithic players."

While Big Tech is a reliable way to play the AI trade, it's certainly not the only way. As AI technology develops, investors should also diversify their AI holdings. New innovations — and investment opportunities — continue to emerge. The bank is eying non-listed companies specializing in large language models, software, and data centers as the next wave of AI beneficiaries.

However, investors should be aware of the added risk of private market investing, warned UBS. Private markets are more illiquid than public ones and are less regulated, so tread carefully.