Computers are already better than humans at identifying images and playing complex games like chess and Go. Automated technologies are rapidly developing that will surpass us in medical diagnostics, driving and other skills.
So, what does this mean for investors in the successful companies of today?
A panel of investment experts recently pondered this question at the 2017 Conexus Financial Equities Summit.
Alphinity Investment Management portfolio manager Lachlan MacGregor said the trick to picking winners in the imminent AI-driven business landscape of the future will be paying attention to those companies that have a plan to adapt.
MacGregor forecast the impact of artificial intelligence (AI) on economies to be even more profound than the 10-year influence of smartphones and the 20-year growth of e-commerce, which is now a $US400 billion ($526 billion) sector, because it will not require the same degree of changes in consumer behaviour.
“Artificial intelligence’s [visible impact on the developed world] will mostly come through the way it changes businesses and existing things. You won’t even notice it,” MacGregor said. “When your bank takes 1000 people out of its processing centre in India and replaces them with a computer in Sydney or somewhere else, you won’t even notice it. That change will be completely based on economics and reality.”
Potential winners and losers
He forecast car makers, insurers and construction businesses, for example, would be hit by demand for automated and driverless cars, which would reduce the need for vehicles, cut accidents and insurance claims, and slow the need for traffic infrastructure and road maintenance.
In contrast, earnings growth for semiconductor makers Nvidia, Micron Technology, Himax Technologies and Samsung had been strong in tandem with demand for increased processing power, MacGregor said.
“These companies are unlikely to be disrupted by start-ups because they’re in a safer place with better barriers to entry; and it’s the same with sensor makers,’’ he explained.
AI leaders such as Amazon, Google parent Alphabet, Microsoft and IBM are obvious investments but they will need to remain agile.
MacGregor said Google, which relies on advertising revenue, must show it can monetise its exposure to AI and noted the search behemoth has squandered opportunities with recent acquisitions of Motorola and smart home technology company Nest.
“Alphinity is not a thematic investor but we care totally about what’s happening to earnings in these businesses,” he said. “That’s why we have about 20 per cent of our fund invested directly or indirectly in some of these trends in automation, not because it’s a theme but because we’re actually seeing an impact in the earnings of these businesses already.”
Australia Post Superannuation Scheme head of investments Ezinne Udeh Martinez said she and the $7 billion corporate pension fund’s portfolio managers were sizing up companies that had the formula to stay relevant to changing consumer needs.
Udeh Martinez pointed out that gaining exposure to businesses with disrupting technologies didn’t necessarily mean investing in IT stocks, noting that online retailer Amazon is classed as a consumer discretionary stock.
Bricks-and-mortar hit too hard?
The panel agreed that AI and machine learning will soon make computers better than humans at driving, diagnosing diseases and building machines, dramatically changing how humans live and work; however, Bank of America Merrill Lynch research analyst David Errington argued the impact of AI and online disruptors in Australia would be hindered by the fact the country is so vast and sparsely populated.
Bricks-and-mortar Australian retailers have been unfairly sold down by investors ahead of the arrival of global online retail giant Amazon, Errington said.
While a New Yorker can now order and receive goods through Amazon in two hours, it would be 20 years before residents of Australian cities could expect such a service, he said.
“I was talking to [the chief executive of Super Retail Group] Peter Birtles, and the biggest issue they have is getting inventory behind their offer … then the physical capabilities to get it to you just don’t exist at the moment,” Errington said. “In my opinion, the technology to facilitate disruption is miles ahead of the physical infrastructure and logistics to deliver it.
“In the last six months, we’ve seen a huge shift with regards to potential online disruption, namely Amazon, and what impact that will have on bricks-and-mortar retail. We’ve seen stocks like JB Hi Fi and Super Retail come off 40 per cent and our view is the fundamentals don’t support the reasons they’ve dropped.”
As a result, logistics and infrastructure businesses look like good investments, while portfolio managers could safely invest in retailers that adapted to change for “10 years at least”.
That’s not to say institutional investors don’t need to be aware of big shifts being brought about by machine learning.
“My experience of fund managers is that the ones that do well get the big changes right and the ones that do quite poorly just don’t see it coming,” Errington said.
Conexus Financial is the publisher of Investment Magazine, top1000funds, and Professional Planner. For details on upcoming events, visit conexusfinancial.com.au/events.
