MS Thematic Thursday -The Race to Regulate AIpdf
MS Thematic Thursday -The Race to Regulate AIpdf
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  1. Ariana.Salvatore@morganstanley.comMichael.Zezas@morganstanley.comEdward.Stanley@morganstanley.comMichelle.M.Weaver@morganstanley.comJasper.De.Maere@morganstanley.comMORGANSTANLEY&CO.LLCArianaSalvatoreSTRATEGIST+1+1-212-761-1779MichaelDZezas,CFASTRATEGIST+1212761-8609MORGANSTANLEY&CO.INTERNATIONALPLC+EdwardStanleyEQUITYSTRATEGIST+44207425-0840MORGANSTANLEY&CO.LLCMichelleM.Weaver,CFAEQUITYSTRATEGIST+1212296-5254MORGANSTANLEY&CO.INTERNATIONALPLC+JasperDeMaereEQUITYSTRATEGIST+44207425-3602ThematicThursday|NorthAmericaTheRacetoRegulateAI2MinuteRead,~500WordsOurGlobalThematicResearchteam'sweeklymemodeliversthematicinvestmentinsightsinjustafewminutes.Ifyouwanttodigdeeper,pleasereachouttousdirectlyand/orcheckoutthevideosandreportslinkedbelow.SenateMajorityLeaderSchumerlastweekannouncedthestartofaseriesoflawmakerbriefingsonAI,focusingon1)thestateofAItoday,2)whereAIisheaded,and3)nationalsecurityimplications.Othergovernments–suchastheEUandChina–arealsobeginningtocrafttheirownuniqueapproachtoAIregulation.Effortsarenascentandvaryacrossgeographies,but,onceimplemented,regulationwilldeterminethedevelopmenttrajectoryandimportantlycouldmitigatesomeoftheriskfromthemostdisruptiveAIusecases.ThereiscurrentlynoconsensusforhowgovernmentsaroundtheworldshouldengagewithAI,andperhapsmostimportantlyhowtheyshouldbalancefosteringinnovationwithprotectingusers'safetyandprivacy.Asaresult,wewillcontinuetowatchthisspacecarefully,asincrementalnewsflowonAIregulationmightsignalwheremarketsmaybeaheadofthemselves.Inthatvein,wehighlighttwokeythingsinvestorsneedtoknowwhenitcomestoAIregulation:MorganStanleydoesandseekstodobusinesswithcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithFINRA,maynotbeassociatedpersonsofthememberandmaynotbesubjecttoFINRArestrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.1.Theglobalregulatorypathforwardisunevenanduncertain.TheEuropeanUnioncurrentlyleadstheUnitedStatesintermsofregulatoryefforts,astheEUParliamenthasapproveditsdraftAIAct,whichseekstosortAIusecasesintoariskmanagementframeworkandapplydifferentlevelsofgovernmentoversightonthebasisofrisklevel.IntheUS,thusfarfederalagencieshaveissuedguidelinesandpursuedindividualenforcementactions.Congressremainsinlearningmode,althoughahandfulofsenatorshaveexpressedtheirinterestinclampingdownoncertainareasofthetechnology,likemakingsureSection230liabilityprotectionsdonotapply.Hence,governmentsarefarawayfromaligningtheirregulatoryapproachesasAIcontinuestodevelopacrossborders.2.Governmentregulation–ifimplementedasproposed–canpossiblymitigatesomeofthemostsevererisksassociatedwithAI.Wethinkofgovernmentregulationasafilterthateffectivelyscreensoutsomeofthemostdraconianscenariosimaginedwhenitcomestonewtechnology.Forexample,theEUAIActasproposedimplementsarisk-managementapproachthatappliesstrictergovernmentoversighttocertainAIusescaseswhilesimplybanningothersthatfallintothe"unacceptable"riskcategory,likereal-timebiometricscreeningorpredictivepolicingsystems.Asaresult,wethinkregulationasproposednowcouldplayanimportantroleindeterminingwhichofthemostdisruptiveusecaseswillactuallyJune 22, 2023 04:01 AM GMT
  2. Wanttodigdeeper?3options...cometofruitionvs.thosethatwillbesidelinedasgovernmentsgetinvolved.Investors,accordingly,shouldnotetheselimitationswhencontemplatingAIdisruptionacrossmarkets.1.Contactus2.ReadourMorganStanleyAIGuidebook3.Listentothispodcast
  3. DisclosureSectionTheinformationandopinionsinMorganStanleyResearchwerepreparedbyMorganStanley&Co.LLC,and/orMorganStanleyC.T.V.M.S.A.,and/orMorganStanleyMexico,CasadeBolsa,S.A.deC.V.,and/orMorganStanleyCanadaLimited.Asusedinthisdisclosuresection,"MorganStanley"includesMorganStanley&Co.LLC,MorganStanleyC.T.V.M.S.A.,MorganStanleyMexico,CasadeBolsa,S.A.deC.V.,MorganStanleyCanadaLimitedandtheiraffiliatesasnecessary.Forimportantdisclosures,stockpricechartsandequityratinghistoriesregardingcompaniesthatarethesubjectofthisreport,pleaseseetheMorganStanleyResearchDisclosureWebsiteatwww.morganstanley.com/researchdisclosures,orcontactyourinvestmentrepresentativeorMorganStanleyResearchat1585Broadway,(Attention:ResearchManagement),NewYork,NY,10036USA.Forvaluationmethodologyandrisksassociatedwithanyrecommendation,ratingorpricetargetreferencedinthisresearchreport,pleasecontacttheClientSupportTeamasfollows:US/Canada+1800303-2495;HongKong+8522848-5999;LatinAmerica+1718754-5444(U.S.);London+44(0)20-7425-8169;Singapore+656834-6860;Sydney+61(0)2-9770-1505;Tokyo+81(0)3-6836-9000.AlternativelyyoumaycontactyourinvestmentrepresentativeorMorganStanleyResearchat1585Broadway,(Attention:ResearchManagement),NewYork,NY10036USA.AnalystCertificationThefollowinganalystsherebycertifythattheirviewsaboutthecompaniesandtheirsecuritiesdiscussedinthisreportareaccuratelyexpressedandthattheyhavenotreceivedandwillnotreceivedirectorindirectcompensationinexchangeforexpressingspecificrecommendationsorviewsinthisreport:JasperDeMaere;ArianaSalvatore;EdwardStanley;MichelleM.Weaver,CFA;MichaelDZezas,CFA..GlobalResearchConflictManagementPolicyMorganStanleyResearchhasbeenpublishedinaccordancewithourconflictmanagementpolicy,whichisavailableatwww.morganstanley.com/institutional/research/conflictpolicies.APortugueseversionofthepolicycanbefoundatwww.morganstanley.com.brImportantRegulatoryDisclosuresonSubjectCompaniesTheequityresearchanalystsorstrategistsprincipallyresponsibleforthepreparationofMorganStanleyResearchhavereceivedcompensationbaseduponvariousfactors,includingqualityofresearch,investorclientfeedback,stockpicking,competitivefactors,firmrevenuesandoverallinvestmentbankingrevenues.EquityResearchanalysts'orstrategists'compensationisnotlinkedtoinvestmentbankingorcapitalmarketstransactionsperformedbyMorganStanleyortheprofitabilityorrevenuesofparticulartradingdesks.MorganStanleyanditsaffiliatesdobusinessthatrelatestocompanies/instrumentscoveredinMorganStanleyResearch,includingmarketmaking,providingliquidity,fundmanagement,commercialbanking,extensionofcredit,investmentservicesandinvestmentbanking.MorganStanleysellstoandbuysfromcustomersthesecurities/instrumentsofcompaniescoveredinMorganStanleyResearchonaprincipalbasis.MorganStanleymayhaveapositioninthedebtoftheCompanyorinstrumentsdiscussedinthisreport.MorganStanleytradesormaytradeasprincipalinthedebtsecurities(orinrelatedderivatives)thatarethesubjectofthedebtresearchreport.Certaindisclosureslistedabovearealsoforcompliancewithapplicableregulationsinnon-USjurisdictions.STOCKRATINGSMorganStanleyusesarelativeratingsystemusingtermssuchasOverweight,Equal-weight,Not-RatedorUnderweight(seedefinitionsbelow).MorganStanleydoesnotassignratingsofBuy,HoldorSelltothestockswecover.Overweight,Equal-weight,Not-RatedandUnderweightarenottheequivalentofbuy,holdandsell.InvestorsshouldcarefullyreadthedefinitionsofallratingsusedinMorganStanleyResearch.Inaddition,sinceMorganStanleyResearchcontainsmorecompleteinformationconcerningtheanalyst'sviews,investorsshouldcarefullyreadMorganStanleyResearch,initsentirety,andnotinferthecontentsfromtheratingalone.Inanycase,ratings(orresearch)shouldnotbeusedorrelieduponasinvestmentadvice.Aninvestor'sdecisiontobuyorsellastockshoulddependonindividualcircumstances(suchastheinvestor'sexistingholdings)andotherconsiderations.GlobalStockRatingsDistribution(asofMay31,2023)TheStockRatingsdescribedbelowapplytoMorganStanley'sFundamentalEquityResearchanddonotapplytoDebtResearchproducedbytheFirm.Fordisclosurepurposesonly(inaccordancewithFINRArequirements),weincludethecategoryheadingsofBuy,Hold,andSellalongsideourratingsofOverweight,Equal-weight,Not-RatedandUnderweight.MorganStanleydoesnotassignratingsofBuy,HoldorSelltothestockswecover.Overweight,Equal-weight,Not-RatedandUnderweightarenottheequivalentofbuy,hold,andsellbutrepresentrecommendedrelativeweightings(seedefinitionsbelow).Tosatisfyregulatoryrequirements,wecorrespondOverweight,ourmostpositivestockrating,withabuyrecommendation;wecorrespondEqual-weightandNot-RatedtoholdandUnderweighttosellrecommendations,respectively.COVERAGEUNIVERSEINVESTMENTBANKINGCLIENTS(IBC)OTHERMATERIALINVESTMENTSERVICESCLIENTS(MISC)STOCKRATINGCATEGORYCOUNT%OFTOTALCOUNT%OFTOTALIBC%OFRATINGCATEGORYCOUNT%OFTOTALOTHERMISCOverweight/Buy135737%27443%20%60339%Equal-weight/Hold166146%29847%18%72047%Not-Rated/Hold20%00%0%00%Underweight/Sell61217%6610%11%22314%TOTAL3,6326381546DataincludecommonstockandADRscurrentlyassignedratings.InvestmentBankingClientsarecompaniesfromwhomMorganStanleyreceivedinvestmentbankingcompensationinthelast12months.Duetoroundingoffofdecimals,thepercentagesprovidedinthe"%oftotal"columnmaynotadduptoexactly100percent.
  4. AnalystStockRatingsOverweight(O).Thestock'stotalreturnisexpectedtoexceedtheaveragetotalreturnoftheanalyst'sindustry(orindustryteam's)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Equal-weight(E).Thestock'stotalreturnisexpectedtobeinlinewiththeaveragetotalreturnoftheanalyst'sindustry(orindustryteam's)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Not-Rated(NR).Currentlytheanalystdoesnothaveadequateconvictionaboutthestock'stotalreturnrelativetotheaveragetotalreturnoftheanalyst'sindustry(orindustryteam's)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Underweight(U).Thestock'stotalreturnisexpectedtobebelowtheaveragetotalreturnoftheanalyst'sindustry(orindustryteam's)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Unlessotherwisespecified,thetimeframeforpricetargetsincludedinMorganStanleyResearchis12to18months.AnalystIndustryViewsAttractive(A):Theanalystexpectstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthstobeattractivevs.therelevantbroadmarketbenchmark,asindicatedbelow.In-Line(I):Theanalystexpectstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthstobeinlinewiththerelevantbroadmarketbenchmark,asindicatedbelow.Cautious(C):Theanalystviewstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthswithcautionvs.therelevantbroadmarketbenchmark,asindicatedbelow.Benchmarksforeachregionareasfollows:NorthAmerica-S&P500;LatinAmerica-relevantMSCIcountryindexorMSCILatinAmericaIndex;Europe-MSCIEurope;Japan-TOPIX;Asia-relevantMSCIcountryindexorMSCIsub-regionalindexorMSCIACAsiaPacificexJapanIndex.ImportantDisclosuresforMorganStanleySmithBarneyLLC&E*TRADESecuritiesLLCCustomersImportantdisclosuresregardingtherelationshipbetweenthecompaniesthatarethesubjectofMorganStanleyResearchandMorganStanleySmithBarneyLLCorMorganStanleyoranyoftheiraffiliates,areavailableontheMorganStanleyWealthManagementdisclosurewebsiteatwww.morganstanley.com/online/researchdisclosures.ForMorganStanleyspecificdisclosures,youmayrefertowww.morganstanley.com/researchdisclosures.EachMorganStanleyresearchreportisreviewedandapprovedonbehalfofMorganStanleySmithBarneyLLCandE*TRADESecuritiesLLC.ThisreviewandapprovalisconductedbythesamepersonwhoreviewstheresearchreportonbehalfofMorganStanley.Thiscouldcreateaconflictofinterest.OtherImportantDisclosuresMorganStanleyResearchpolicyistoupdateresearchreportsasandwhentheResearchAnalystandResearchManagementdeemappropriate,basedondevelopmentswiththeissuer,thesector,orthemarketthatmayhaveamaterialimpactontheresearchviewsoropinionsstatedtherein.Inaddition,certainResearchpublicationsareintendedtobeupdatedonaregularperiodicbasis(weekly/monthly/quarterly/annual)andwillordinarilybeupdatedwiththatfrequency,unlesstheResearchAnalystandResearchManagementdeterminethatadifferentpublicationscheduleisappropriatebasedoncurrentconditions.MorganStanleyisnotactingasamunicipaladvisorandtheopinionsorviewscontainedhereinarenotintendedtobe,anddonotconstitute,advicewithinthemeaningofSection975oftheDodd-FrankWallStreetReformandConsumerProtectionAct.MorganStanleyproducesanequityresearchproductcalleda"TacticalIdea."Viewscontainedina"TacticalIdea"onaparticularstockmaybecontrarytotherecommendationsorviewsexpressedinresearchonthesamestock.Thismaybetheresultofdifferingtimehorizons,methodologies,marketevents,orotherfactors.Forallresearchavailableonaparticularstock,pleasecontactyoursalesrepresentativeorgotoMatrixathttp://www.morganstanley.com/matrix.MorganStanleyResearchisprovidedtoourclientsthroughourproprietaryresearchportalonMatrixandalsodistributedelectronicallybyMorganStanleytoclients.Certain,butnotall,MorganStanleyResearchproductsarealsomadeavailabletoclientsthroughthird-partyvendorsorredistributedtoclientsthroughalternateelectronicmeansasaconvenience.ForaccesstoallavailableMorganStanleyResearch,pleasecontactyoursalesrepresentativeorgotoMatrixathttp://www.morganstanley.com/matrix.Anyaccessand/oruseofMorganStanleyResearchissubjecttoMorganStanley'sTermsofUse(http://www.morganstanley.com/terms.html).Byaccessingand/orusingMorganStanleyResearch,youareindicatingthatyouhavereadandagreetobeboundbyourTermsofUse(http://www.morganstanley.com/terms.html).InadditionyouconsenttoMorganStanleyprocessingyourpersonaldataandusingcookiesinaccordancewithourPrivacyPolicyandourGlobalCookiesPolicy(http://www.morganstanley.com/privacy_pledge.html),includingforthepurposesofsettingyourpreferencesandtocollectreadershipdatasothatwecandeliverbetterandmorepersonalizedserviceandproductstoyou.TofindoutmoreinformationabouthowMorganStanleyprocessespersonaldata,howweusecookiesandhowtorejectcookiesseeourPrivacyPolicyandourGlobalCookiesPolicy(http://www.morganstanley.com/privacy_pledge.html).IfyoudonotagreetoourTermsofUseand/orifyoudonotwishtoprovideyourconsenttoMorganStanleyprocessingyourpersonaldataorusingcookiespleasedonotaccessourresearch.MorganStanleyResearchdoesnotprovideindividuallytailoredinvestmentadvice.MorganStanleyResearchhasbeenpreparedwithoutregardtothecircumstance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  5. 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hePrudentialRegulatoryAuthorityandregulatedbytheFinancialConductAuthorityandthePrudentialRegulatoryAuthority,disseminatesintheUKresearchthatithasprepared,andapprovessolelyforthepurposesofsection21oftheFinancialServicesandMarketsAct2000,researchwhichhasbeenpreparedbyanyofitsaffiliates.RMBMorganStanleyProprietaryLimitedisamemberoftheJSELimitedandA2X(Pty)Ltd.RMBMorganStanleyProprietaryLimitedisajointventureownedequallybyMorganStanleyInternationalHoldingsInc.andRMBInvestmentAdvisory(Proprietary)Limited,whichiswhollyownedbyFirstRandLimited.TheinformationinMorganStanleyResearchisbeingdisseminatedbyMorganStanleySaudiArabia,regulatedbytheCapitalMarketAuthorityintheKingdomofSaudiArabia,andisdirectedatSophisticatedinvestorsonly.TheinformationinMorganStanleyResearchisbeingcommunicatedbyMorganStanley&Co.Internationalplc(DIFCBranch),regulatedbytheDubaiFinancialServicesAuthority(theDFSA),andisdirectedatProfessionalClientsonly,asdefinedbytheDFSA.ThefinancialproductsorfinancialservicestowhichthisresearchrelateswillonlybemadeavailabletoacustomerwhowearesatisfiedmeetstheregulatorycriteriatobeaProfessionalClient.AdistributionofthedifferentMSResearchratingsorrecommendations,inpercentagetermsforInvestmentsineachsectorcovered,isavailableuponrequestfromyoursalesrepresentative.TheinformationinMorganStanleyResearchisbeingcommunicatedbyMorganStanley&Co.Internationalplc(QFCBranch),regulatedbytheQatarFinancialCentreRegulatoryAuthority(theQFCRA),andisdirectedatbusinesscustomersandmarketcounterpartiesonlyandisnotintendedforRetailCustomersasdefinedbytheQFCRA.AsrequiredbytheCapitalMarketsBoardofTurkey,investmentinformation,commentsandrecommendationsstatedhere,arenotwithinthescopeofinvestmentadvisoryactivity.Investmentadvisoryserviceisprovidedexclusivelytopersonsbasedontheirriskandincomepreferencesbytheauthorizedfirms.Commentsandrecommendationsstatedherearegeneralinnature.Theseopinionsmaynotfittoyourfinancialstatus,riskandreturnpreferences.Forthisreason,tomakeaninvestmentdecisionbyrelyingsolelytothisinformationstatedheremaynotbringaboutoutcomesthatfityourexpectations.ThetrademarksandservicemarkscontainedinMorganStanleyResearcharethepropertyoftheirrespectiveowners.Third-partydataprovidersmakenowarrantiesorrepresentationsrelatingtotheaccuracy,completeness,ortimelinessofthedatatheyprovideandshallnothaveliabilityforanydamagesrelatingtosuchdata.TheGlobalIndustryClassificationStandard(GICS)wasdevelopedbyandistheexclusivepropertyofMSCIandS&P.MorganStanleyResearch,oranyportionthereofmaynotbereprinted,soldorredistributedwithoutthewrittenconsentofMorganStanley.IndicatorsandtrackersreferencedinMorganStanleyResearchmaynotbeusedas,ortreatedas,abenchmarkunderRegulationEU2016/1011,oranyothersimilarframework.Theissuersand/orfixedincomeproductsrecommendedordiscussedincertainfixedincomeresearchreportsmaynotbecontinuouslyfollowed.Accordingly,investorsshouldregardthosefixedincomeresearchreportsasprovidingstand-aloneanalysisandshouldnotexpectcontinuinganalysisoradditionalreportsrelatingtosuchissuersand/orindividualfixedincomeproducts.MorganStanleymayhold,fromtimetotime,materialfinancialandcommercialinterestsregardingthecompanysubjecttotheResearchreport.ThefollowingauthorsareFixedIncomeResearchAnalysts/Strategistsandarenotopiningonorexpressingrecommendationsonequitysecurities:MichaelDZezas,CFA;ArianaSalvatore.RegistrationgrantedbySEBIandcertificationfromtheNationalInstituteofSecuritiesMarkets(NISM)innowayguaranteeperformanceoftheintermediaryorprovideanyassuranceofreturnstoinvestors.Investmentinsecuritiesmarketaresubjecttomarketrisks.Readalltherelateddocumentscarefullybeforeinvesting.©2023MorganStanley
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