Investors will need to be discerning in terms of which companies and technologies they choose to back with their capital when it comes to the “game changer” that is artificial intelligence, according to MLC Asset Management’s chief investment officer.
In his latest market insight, MLC’s Dan Farmer outlined that the firm’s thoughts on AI remain “preliminary” amid nascent iterations of the technology.
“There is abundant literature arguing that a very large part of the economy is likely to see AI integration and widespread employment dislocations, but it’s equally reasonable to assert that a good deal of what’s been voiced falls into the ‘guesstimate’ category,” he said.
He further elaborated that AI has been touted a game changer akin to the Industrial Revolution, though a sober perspective would be to expect its significant benefits to emerge only in the next two decades.
“Unlocking the potential productivity benefits of the technology will require the reskilling of workforces and organisational and process innovation, both of which are historically slow moving,” Farmer said.
Additionally, he cautioned against “over-egging” potential productivity benefits amid all the market buzz.
“AI adoption, for now, appears to be greatest in a few pockets of the economy, like customer contact centres and software engineering, where it is particularly compelling as a productivity enhancer that can reduce labour costs.
“Even so, we need to guard against over-egging potential productivity benefits because productivity growth data around computers and the internet shows that while productivity has been boosted, it has not been a massive boost and productivity growth reverted to around the 1970s–’80s pace after the late 1990s and early 2000s,” he said.
In the current state of the market, the incumbents with their first mover advantages are likely to dominate this first stage of the technology, he contended. Among these incumbent tech leaders are companies like Meta, Microsoft, and Alphabet, which have benefitted from partnerships with firms like OpenAI, and have been investing significantly in AI research and development.
However, shareholders may have “mixed feelings” towards this new wave of technology industry investment, Farmer highlighted.
“The spending will likely crimp margins, and the potential for a digestion period after rapid early adoption remains a possibility,” Farmer said.
“Moreover, coinciding at a time when the cost of capital has been rising, investors will need to be very discriminating over which companies and technologies they back with their capital.
He voiced that “an abundance of scepticism over ‘shiny objects’ will be required”, else billions of dollars of capital could prove unfruitful, “as was the case in the late 1990s technology boom that transitioned to a bust”.
Regarding MLC’s approach, he explained that managers have differing views on the valuation outlook for companies directly involved in AI, with some anticipating growth while others are exploring opportunities in ’AI-adjacent’ firms.
“This enables our portfolios to participate in the AI theme more broadly. From our perspective, it’s not just the obvious ‘picks and shovels’ providers that are reaping the benefits of AI commercialisation. Many ‘old economy’ companies are increasing their productivity by adopting AI in both the development and delivery of their products,” he shared.
These include domestic companies like Treasury Wine Estates, Sonic Healthcare, and Suncorp in MLC’s portfolios, all of which offer exposure to the AI theme.
“These companies use AI in a variety of ways benefitting customers as well as shareholders. Our investment managers are consistently on the lookout across the value chain to identify companies who are improving their businesses in multiple ways, including by adopting AI,” he said.
He added that MLC’s investments in the AI theme also encompass private markets, focusing on companies integrating this technology to enhance business efficiency.
Last month, Blackstone chief executive and co-founder Stephen Schwarzman said AI will evolve from its current IQ of around 180 to 200 to 12,000 in the next four years.
According to the CEO, “almost everyone I know is very concerned about what might go wrong with the technology”, especially those working on developing it.
“It’s the first time I’ve ever seen businesspeople rooting for regulation,” he mused.
He predicted the AI revolution will eventually lead to the establishment of a global organisation, akin to the World Health Organisation or World Trade Organisation, dedicated to keeping pace with the evolving landscape of artificial intelligence.
“I was in China two weeks ago, and President Xi was saying, ‘we’ve really got to have some kind of global organisation’ for AI. He said it doesn’t do any good for some countries to regulate and others to not. He said we have to have coordination, and I think that’s widely viewed as where we’re going.”
