Anyone who uses social media applications or shops online will be familiar with seeing advertisements that appear to have been curated just for them. Mobile phone applications suggest themselves at certain times of the day. For example, my own phone’s Siri application promotes the use of Spotify in the evening as it knows I like to have some nice tunes to accompany dinner.
These are tasks driven by artificial intelligence (AI) and such innovations have already contributed to the stellar share price performance of leading mega-cap technology companies.
However, there is much more to come. AI, especially generative AI, is an enabling technology like no other seen so far. Humans have always developed techniques for making labour more efficient, for example, the wheel, iron tools, the spinning jenny, electricity, telephony and, over the past half century, digitalisation. These developments contributed to reducing the burden of physical labour, improving communications to the benefit of commerce and automating complex production techniques.
AI takes things to a new level using machine learning and large language models. The core value is the ability to use huge sets of data to generate outputs that are largely beyond the capability of most individuals. These outputs could be self-driving cars that incorporate weather and traffic conditions into providing safer, more efficient journeys. They could be the ability to detect health problems at an early stage based on identifying patterns in massive patient databases. The applications appear endless.
The productivity factor
Economists are suggesting, as was the case in other technology revolutions throughout history, AI will boost productivity. It will do this through automating tasks currently performed by humans across a range of occupations. This will not only make performing these tasks quicker and cheaper, but it will also free up people to spend increased time on more productive activities. Higher productivity means higher rates of economic growth and living standards, boosting returns to activity across a range of industries. Jobs lost to AI, because it can do them quicker and more efficiently than humans, are very likely to be replaced by new, more productive and better-paid positions.
The investment opportunities across the AI value chain are clear, such as the semiconductor producers, the hardware manufacturers and the cybersecurity service providers.
The value creation is already visible; look at the performance of technology stocks so far in 2023 – the tech-heavy Nasdaq index is up 34 per cent year to date.
The ‘picks and shovels’ assets are an obvious place to invest. To be able to run AI applications, and more and more enterprises will, there is a growing need for powerful silicon chips, servers, network solutions and cloud computing capabilities.
The wider market
Unlike the internet boom at the turn of the century, there are established technology companies able to lead the AI revolution and manage the winners and losers through their own investment in early-stage developers. As such, the mega-cap technology stocks are likely to continue to benefit and deliver potentially superior earnings growth as more and more applications are developed.
The metaverse is a clear area of interest, with gaming and other virtual reality applications standing to benefit from AI techniques that merge the real and virtual worlds.
The vision should extend beyond the established technology sector. If AI is to be a transformative technology that boosts economy-wide productivity, it must enable enhancements in efficiencies and profitability in companies across the economy. Let your imagination run riot for a moment.
Technology is all around us, but look at everyday life and see where you think AI can deliver better goods and services, make your job more productive and improve the living environment. E-commerce tailored financial services and curated entertainment through streaming services are already common ways in which, as consumers, we benefit from AI.
But what about being able to benefit from the use of AI in managing road traffic more effectively, more efficient inventory and logistics management to meet shortages of goods at the retail level, better healthcare delivery and easier access to education resources?
Businesses that embrace AI should in turn provide investors the opportunity to benefit from higher profits and growing market share. In an economy that might be growing more quickly, AI can be a potential driver of better investment returns on different fronts.
Longer-term implications
There are broader considerations. On the plus side, AI can help in the advancement of medical science and drug development. It can help improve crop yields and manage water resources better. We have looked at the key technologies being employed in the fight against climate change and biodiversity loss and AI will play a massive role here. The delivery of public services to remote or disadvantaged communities can benefit from governments embracing the opportunities provided by AI.
Investors are concerned now about rising government debt levels that might provoke either higher taxes or reduced provision of public goods like health and education. If AI is genuinely productivity-enhancing and efficiency-enabling, it can play a role in helping deliver the ever-growing demands on the public sector from ageing populations in many advanced economies. Imagine the potential virtuous implications of more efficient public services and better healthcare provision, including the identification and treatment of costly diseases at much earlier stages.
Of course, there are concerns about AI. It has many possible malevolent uses, from fraud to more sinister exploitative or political purposes. There will also be displacement of workers. But technology has a habit of becoming embedded into everyday life and has done since cave dwellers fashioned clubs from tree branches. There does need to be governance of AI as there does of social media, medicine and many other industries.
The world needs a new driver of growth. The effects of ending the Cold War, China’s rural-urban economic miracle and the communications revolution of the 1990s are fading. Populations are ageing, income inequality is growing and the whole planet faces a crisis of sustainability. Harnessing the power of machines, resting upon millenniums of human experience, discovery and knowledge, should be good for investors and even better for humanity.
Chris Iggo is chief investment officer of Axa Investment Management.
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