Megatrends: how will AI impact your future investments?

The artificial intelligence (AI) trend has taken centre stage in the UK Government’s new growth strategy. Chancellor Jeremy Hunt’s commitment to an AI and quantum computing strategy is a recognition of its potential importance in global economic and political power. It has become far more than designer robots, promising to bring automation and digitisation – and significant disruption – to multiple industries.

However, while AI could deliver solutions to some of the world’s largest problems, from climate change to worsening demographics, it also comes with a downside. It threatens livelihoods and could unleash social disruption. The most pessimistic assessments see even darker problems as AI grows in sophistication, with the potential for humans to lose control of this powerful new technology.

Artificial intelligence is already part of our daily lives, from Alexa in our kitchens, to chatbots from our banks, to smart homes and infrastructure. AI safety functions are embedded in our cars, while agriculture and industry are making use of machine learning, a branch of AI which seeks to imitate the way humans learn to become more efficient. The availability of enormous quantities of data and new algorithms have led to major AI breakthroughs in many industries in recent years.

However, the vision for AI is far bigger. AI is starting to be used in healthcare to analyse large volumes of data and spot patterns. It is a vital part of autonomous vehicles, allowing cars, lorries and trains to operate without human intervention. Factories are becoming increasingly automated, while it also promises to revolutionise agricultural practices, making food systems vastly more efficient, minimising the use of fertilisers, while allowing adaptation to different weather conditions.

In reality, it is difficult to think of a sector that doesn’t have the potential for disruption. Almost all industries could benefit from AI taking over repetitive tasks that humans perform inefficiently, but also the insights that analysis of big data can deliver – which are their most productive sales lines, for example, or where are the bottlenecks and inefficiencies?

Governments continue to invest in the supercomputers necessary to process the vast amount of data on which AI relies. The UK recently entered this supercomputer arms race, with the latest budget promising £1 billion to help develop an exascale supercomputer¹, that will have 1,000 times more speed and power than today’s most advanced computers. However, it has a way to go to compete with China, which already has over 170 supercomputers².

On the one side, AI has the power to potentially solve the world’s largest problems. It plays a role in many of the global megatrends we have identified for the next decade. For example, AI-powered data engineering will allow companies to forecast and track emissions, as well as optimising emission reduction across the production chain. Smart grids can optimise electricity distribution, while smart meters can help improve energy efficiency³.

We expect AI to be an important tool in tackling worsening demographics in the developed world. In 2050 there will be 80 pensioners for every 100 people of working age in Japan. This will have massive implications for labour markets, pensions, and healthcare. As a result, Japan is already pioneering the use of smart robots to help support its ageing population⁴. It has one of the highest robot densities in the world⁵, as it seeks to offset the growing pressures in its labour market.

It may also be a fertile source of economic growth. Research from Goldman Sachs finds that generative artificial intelligence, a form of AI which generates content from simple prompts, could drive a 7% (or almost $7 trillion) increase in global GDP over the next decade. It could also lift productivity growth by 1.5% over the same time frame, presenting a compelling solution to the weak productivity growth that has held back mature economies⁶ in recent years.

The Goldman Sachs report highlights the potential negative impacts of AI on our livelihoods across the world. It estimates that shifts in workflows triggered by these advances could expose 300 million full-time jobs to automation – equating to almost 10% of the global labour force. Certain jobs – long-distance lorry drivers, claims processors, translators – could become obsolete.

The advent of ChatGPT, a generative AI chatbot, has been a wake-up call. Industries such as journalism and education have realised that it is not just manual jobs that are threatened by AI, but office jobs may also be replaced by machines.

Economists from Goldman Sachs estimate that roughly two-thirds of US occupations are exposed to some degree of automation by AI⁶. Of those occupations that are exposed, roughly a quarter to as much as half of their workload could be replaced.

Despite the risk of automation hanging over many industries, history shows that advances in technology rarely lead to sustained increases in unemployment. Instead, new jobs emerge to complement the emerging technologies – recent examples include new jobs in the technology and renewable energy sectors. A 2020 study by economist David Autor supports this claim, finding that 60% of today’s workers are employed in occupations that didn’t exist in 1940⁷. Evidence on the impact of technology on labour markets – with advances generally leading to net job creation, rather than net job destruction – should help to allay fears about the risks for global workers.

However, there are no guarantees history will repeat itself; new jobs might not materialise, or advances in AI could lead to social disruption. Ian Hogarth, an investor and co-author of the annual ‘State of AI’ report⁸, recently warned:

Against this complex backdrop, assessing the investment opportunities requires careful consideration. Just because a phenomenon is global and has a transformative impact doesn’t necessarily make it a good investment. Emerging areas often attract ‘hot money’ and quickly become expensive, leading to poor risk-adjusted returns.

Equally, some of the uses of AI are controversial. There are relatively few ‘pure play’ AI companies and there is a risk that some of them will fall foul of social and environmental considerations. AI depends on data, and it is important that it is gathered and used responsibly.

That is not to say there aren’t opportunities. Growth is rapid, and governments and businesses are investing to keep pace with their peers. Instead of trying to pick winners from the increasing number of unprofitable AI start-ups, we are investing in the more established technology names. Few companies have the scale of data management and processing required to handle the growing volumes of data that are crucial to the successful deployment of AI. These incumbent mega caps are, therefore, likely to maintain their dominant positions for the foreseeable. They also have the cash to hoover up the winners in the start-up space, as well as the resources to invest in AI research and development. Our analysts are focusing on companies that have a proven track record of innovation and delivering shareholder value.

We are also thinking through the implications for other sectors and industries. As investors, we do not want to find ourselves allocating capital to businesses facing an existential threat from this new technology. Similarly, with this type of development, it can often be more rewarding to invest in the ‘picks and shovels’ rather than the gold rush. Here, that would be areas such as semiconductors or the hardware that is necessary for AI development. These companies are unlikely to see the same boom-bust dynamics as the companies at the coal face of AI.

Artificial Intelligence is changing the world and will continue to do so. It will play a crucial role in the technological revolution we expect to see over the next decade. To exploit this, we prefer to invest in companies that have proven experience in deploying new technologies effectively while avoiding those that face an existential threat.

Sources:

¹August, G., Hunt promises nearly £1bn for supercomputer to help AI researchers, Evening Standard, 15 March 2023

²Alsop, T., Distribution of the 500 most powerful supercomputers worldwide from 2019 to 2022, by country, Statista, June 2022

³https://openinnovability.enel.com/media/insights/2023/02/how-ai-accelerates-energy-transition

⁴3 ways AI is accelerating the energy transition, openinnovability.enel.com, 8 February 2023

⁵International Federation of Robotics

⁶ Generative AI could raise global GDP by 7%, Goldmach Sachs, 5 April 2023

⁷Autor, D., Mindell, D., Reynolds, E., The Work
of the Future: Building Better Jobs in an Age of Intelligent Machines, MIT Work of the Future, December 2020

⁸Hogarth, I., We must slow down the race to God-like AI, Finacial Times, 13 April 2023