How AI Could Impact the Economy and Investing
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
Forecasting what the future holds is always a difficult task. Nevertheless, many clients are curious to hear our perspective on artificial intelligence (AI). How is it likely to impact the economy? And in turn, how might it impact investing?
Regarding the economy, four outcomes are likely:
Increased Task Automation
Improved Long-Term Growth
New Job Possibilities
Regulatory Pressures
First, we will see, and are already seeing, task automation across a large range of industries, including financial services, health care and retail. The extent of this automation will grow substantially over time in unexpected ways, encompassing tasks that initially seemed impossible to automate and impacting industries that may not have been obvious in advance. So, while more automation is easy to predict, the exact forms that this will take will almost certainly surprise in many instances.
Second, the automation outcomes should broadly be positive for long-term economic growth, which we all should root for given the global aging population dynamics and government debt burdens. While there are different forecasts, Goldman Sachs projects that AI will start to boost U.S. GDP by 1.5% annually over the next 10 years. (1)
Third, because of automation we will see new job possibilities unfold, but as with any new technology, some jobs and companies will be far more negatively impacted than others.
Finally, AI will likely face significant legal, political and regulatory pressure that, as with automation, will take unexpected turns and forms. In general, the primary risk is that the regulatory burden compromises the economic benefits that could have accrued.
From an investment standpoint, three points come to mind:
First, a safe assumption is that markets are already pricing in all the above points. This is not to say, of course, that markets will be able to perfectly price in what actually occurs, but a reasonable assumption is nevertheless that none of us can predict outcomes better than markets themselves.
Second, broad diversification across stocks, industries and countries will help mitigate the risks of automation. As with any new technology, a multitude of companies that seem to be great investments today may have large portions of their business models rendered obsolete by AI.
Finally, connected with the first point, a sensible supposition is that the public companies most likely to benefit from AI either directly or indirectly are already priced at high valuations. This will likely lead to lower — not higher — realized returns when compared to the broad market.
If you have questions about your portfolio and its potential exposure to developments in AI, speak with your financial planner.
And for a perspective on AI beyond market performance, check out this article AI Won’t Replace You — But It Will Spy on You from inequality.org.
