Artificial Intelligence – Ephemeral Vs. Durable

Insights
Views & insights

In our last note, we discussed probabilistic thinking and the inherent unpredictably of investment markets over the short term. We also discussed some reasons for optimism, our focus on investing in higher quality assets and long-term thinking.

Share

12 July 2023 | 9 minute read

Download Artificial Intelligence – Ephemeral Vs. Durable PDF

Indeed, this note covered so much of our core philosophy and approach that I haven’t really felt compelled to follow it up with another note, until now that is.

Over the past few months, investor imaginations have been re-kindled once more and we have seen the return of ‘animal spirits’, with artificial intelligence (AI) grabbing the headlines. The leading AI stocks have experienced some very notable gains this year and not surprisingly we are being asked about our exposure to this new ‘mega trend’.

So, what is our response? How do we think about investing in this exciting new area? Well, for a start it is not new; AI and machine learning have been around for some time but the advances we have seen over the past six months are remarkable. It is clear to us that we have seen a breakthrough in computing.

Whilst, we are very wary of investment fads and bubbles, we feel pretty confident in saying AI is not a bubble (at least not yet) and the potential for both the economy and the stock market is very real.

The challenge we face though is that investing in high growth businesses is often a losing game.

High growth businesses are often richly valued and attract very motivated competitors, keen to share in the spoils, such that investors can fall into the trap of paying a high multiple on unsustainably high profits.

We need only look at what happened during the pandemic when investors overpaid for the covid or ‘stay at home’ beneficiaries and the subsequent declines in the share prices of these previous market darlings.

Now as regular readers know, we believe having a strategic allocation to investing in innovation is warranted.

We have long felt that the economy is undergoing a number of technology-driven changes and we have invested in strategies seeking to identify the beneficiaries.

However, it is important to state that this is not easy, and it has presented challenges over the past year, with strategies more focussed on innovation underperforming markedly in 2022.

Whilst we retain conviction in our preferred strategies, it is a reminder of the importance of having a long-term mindset, as patience can be tested from time to time.

It is also an important reminder of the ever-lurking danger of the ephemeral, and the temptation of investing in the next big thing. Maybe you will invest in the next Apple or Tesla, but the odds are not in your favour in this pursuit.

We have little doubt that AI and machine learning will have a big impact on markets and the economy, but we need to be considered when reflecting on what this means for our portfolios. The societal and socio- economic impacts are also likely to be significant (hopefully that is not too much of an understatement) and no doubt an ongoing source of debate.

From an investing perspective, the challenge is somewhat daunting, given the technical proficiency required to understand the technology. However, it is not insurmountable. We are fortunate to have an experienced in-house research team and access to a number of experts in the field.

Furthermore, it has become increasingly apparent in our conversations over the past few months that this challenge is perhaps best met obliquely or by asking the question in different ways.

For example, instead of asking what is going to change over the next decade, perhaps we should ask what is not going to change? This leads us towards focussing on resilience and durability. It leads us towards companies that have survived and prospered during past technological advances, in areas such as consumer staples, beverages and luxury.

Whilst it may be difficult (or next-to-impossible right now) to identify the long-term winners of advances in AI, we can also ask which companies will supply the winners; who will sell the ‘picks and shovels’ of the AI goldrush?

We can ask which companies will benefit from the capital that is likely to be invested in the coming decade? This is a much easier question to answer today, with certain companies very well positioned.

Which companies will benefit from AI adoption is another question to pose, with companies in control of proprietary datasets an interesting area of focus.

We can also ask whether there are specialist investors in innovation that we can invest alongside, recognising our own limits and strengths. We believe this is a much more durable approach than trying to pick winners at too early a stage.

Investing with a manager that is taking a diversified approach, investing across a portfolio of businesses, with a dedicated team focussed on innovation, is much more likely to be successful than seeking to invest in individual companies on the cutting edge.

How we approach this challenge, and the questions we should ask, prompts much interesting debate at our investment committees and we have asked whether we are witnessing something transient or not.

We have asked ourselves whether it is really credible to see a technology-driven bull market so quickly after the apparent bursting of a bubble in cryptocurrency and a number of high-growth technology businesses, especially against the background of rising interest rates.

However, our analysis suggest that this is ‘real’ and whilst we are not trying to time the market or issue any kind of rallying cry to invest in technology, we believe that long-term investors need to consider the implications over the next decade.

We are mindful of the arguments presented by less optimistic investors today, noting that ‘AI’ stocks have already appreciated significantly, and valuations have expanded. However, when we compare valuations and growth rates for the leading stocks today against past market cycles, we don’t see any great cause for concern. We are not suggesting these companies are especially good value, but we don’t see unsustainable excess.

Whilst our focus will always be on protecting and growing our clients’ capital over the long term, we also need to be aware of the changing nature of the economy and investment markets.

We have always described ourselves as pragmatic optimists and it is through this lens that we approach the fascinating challenges and opportunities we will face over the coming years.

As always, please do not hesitate to contact us to discuss our views further.

Ian Quigley
T: +353 1 2600080
E: ian.quigley@brewin.ie

www.brewin.ie


Disclaimer

Brewin Dolphin Wealth Management Limited trading as RBC Brewin Dolphin is regulated by the Central Bank of Ireland. For UK clients only: RBC Brewin Dolphin is deemed authorised and regulated by the Financial Conduct Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Financial Services Contracts Regime, which allows EEA-based firms to operate in the UK for a limited period to carry on activities which are necessary for the performance of pre-existing contracts, are available on the Financial Conduct Authority’s website. Registered office: Number One Ballsbridge, Building 1, Shelbourne Road, Dublin 4, D04 FP65. Registered in Dublin, Ireland No. 235126.

This publication should be regarded as being for information only and should not be considered as an offer or solicitation to sell, buy or subscribe to any financial instruments, securities or any derivative instrument, or any other rights pertaining thereto (together, ‘investments’). This publication is classified as a ‘marketing communication’ in accordance with the European Union (Markets in Financial Instruments) Regulations 2017. This means that (a) it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and (b) it is not subject to any prohibition on dealing ahead of the dissemination of investment research. RBC Brewin Dolphin does not express any opinion as to the present or future value or price of any investments referred to in this publication. This publication may not be reproduced without the consent of RBC Brewin Dolphin.

The information contained in this publication has been compiled from sources believed to be reliable, but, neither RBC Brewin Dolphin, nor any of its directors, officers, or employees accept liability for any loss arising from the use hereof or makes any representations as to its accuracy and completeness. The information contained in this publication is valid as at the date of this publication. This informationis subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the matters discussed herein.

This publication does not constitute investment advice and has been prepared without regard to individual financial circumstances, objectives or particular needs of recipients. Readers should seek their own financial, tax, legal, regulatory and other advice regarding the appropriateness or otherwise of investing in any investments or pursuing any investment strategies.

An investment in any of the investments discussed in this publication may result in some or all of the money invested being lost. Past performance is not a reliable guide to future performance. To the extent that this publication is deemed to contain any forecasts as to the performance of any investments, the reader is warned that forecasts are not a reliable indicator of future performance. The value of any investments can fall as well as rise. Foreign currency denominated investments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such investments. Certain transactions, including those involving futures, options and other derivative instruments, can give rise to substantial risk and are not suitable for all investors.

RBC Brewin Dolphin (or its directors, officers or employees) may to the extent permitted by law, own or have a position in the investments (including derivative instruments or any other rights pertaining thereto) of any issuer or related company referred to herein, and may add to or dispose of any such position or may make a market or act as a principal in any transaction in such investments or financial transactions.

RBC Brewin Dolphin’s conflicts of interest policy is available at www.brewin.ie/conflicts-policy-summary

Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: Past performance is not a reliable guide to future performance.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: This product / service may be affected by changes in currency exchange rates.
Warning: The income you get from this investment may go down as well as up.

You may be interested in

Perspective Magazine Spring 2023

Perspective magazine 15 min read
Perspective Magazine Spring 2023

Probability

Investing 3 min read
Probability

Reflections

Market news 3 min read
Reflections

The value of your investment may go down as well as up.