“By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machines.” – Economist, Paul Krugman
“In the UK… GDP per capita grew about 40% between 1700 and 1800. It more than doubled between 1800 and 1900. And between 1900 and 2000, it grew more than fourfold.” – Vox Media
Back in 1982, Time magazine surprised its readers by choosing the PC as its person of the year. This year, it could probably make a strong case for generative artificial intelligence (AI) to get the award. The technology has shifted financial markets and dominated news headlines since ChatGPT was released to the public last year and became the most rapidly adopted application yet to hit the market.
Investor enthusiasm for AI is one of the factors that has caused a surge in stock prices of Big Tech companies, Alphabet, Amazon, Apple, Meta, Microsoft, Tesla and most notably Nvidia in the first half of the year. These stocks have had an outsized effect on the S&P 500 and Nasdaq indices this year, turning what may otherwise have been a mediocre six months into a banner half-year for equity returns.
Revolutionary or overhyped?
The questions that we often get asked are whether these returns can be justified, whether they’re sustainable, and how we are ensuring that our clients can maximise the upside and mitigate any downside. The answers depend largely on whether one believes that the current AI frenzy is the early phase of a revolution or just another interesting but overhyped technology innovation.
We lean towards the former view, although we hasten to add that we are not thematic investors. While we shy away from trying to pick winners and losers in equities in general and nascent markets like AI in particular – our outlook is that the current wave of generative AI builds on the foundations of the internet, cloud computing and earlier AI tech to offer potentially game-changing impacts.
Generative AI solutions like DALL·E and ChatGPT generate content such as images, music, speech, code, video or text by learning from and interpreting large volumes of data. Whereas earlier automation technologies focused on routine and repetitive work, generative AI can take on complex tasks that were once the purview of knowledge workers.
Trillions in GDP growth driven by generative AI
As the technology matures, the effect on the economy could be as profound as the internet. Goldman Sachs Research believes generative AI could drive a 7% (or almost $7 trillion) increase in global GDP and lift productivity growth by 1.5 percentage points over a decade. McKinsey is also making bold predictions, speculating that GenAI could add $2.6 trillion to $4.4 trillion per year to global output.
Do these forecasts sound overly optimistic or bold? In the short term, they might be, but in the long term, technology leaps can lead to staggering economic gains. When it comes to the web and the internet, sceptics doubted how quickly or dramatically these innovations would change the economy. But by some estimates, the internet is worth $2.1 trillion to the US’s $20.5 trillion GDP. Silicon Valley, the centre of the digital economy, has a GDP per capita among the world’s highest outside small petro-states like Qatar, and the indirect value to other business and persons is almost immeasurable.
We believe that AI, like the industrial revolution and the internet, will ultimately revolutionise most industries and benefit most people. It has the potential to make us richer and more productive. But there will be workers, companies and industries that will be left behind—the equivalents to handweavers during the industrial revolution and companies like Blockbuster and Kodak in the internet age.
The ethics questions that government, regulators and companies will face will be profound in areas ranging from how AI systems use personal data or copyrighted intellectual property, to who will need to bear the burden of reskilling those whose skills are made obsolete by the technology. This is outside the scope of our article, but it’s worth noting just how complex this transition will be.
AI will drive wealth creation over the next decade
Looking back to the internet, AI investments could deliver exponential returns and ruinous losses. If you’d had the foresight to have invested $1,000 in Amazon upon its initial IPO in 1997, you’d have roughly $1.83 million today. But if you’d backed the likes of Pets.com or eToys during the dotcom boom, you’d have lost most of your investment.
Outside of just the software and hardware companies that are profiting from creating the tech that powers AI, there will also be a new wave of companies that capitalise on AI to transform entire markets. Some of them will be incumbent banks, retailers, insurers, manufacturers or FMCG brands, with others being startups.
We’re not stock-pickers, so we’re not trying to guess which company will be the next Amazon or Tesla. Neither can we predict if and when AI stocks will come down to earth, or which will survive a shakeout. However, we believe that AI could be the catalyst for a complete step-change upwards in the global economy over the next decade, thus offsetting concerns about the sustainability of the growth seen over the last decade and reshaping all industries and all quality businesses that have the leadership and means to adopt this new technology.
