Robots are taking over the world. A recent Oxford University study suggested that just under half of the US labour market is at risk of being replaced by robots. Advances in artificial intelligence are now enabling software to learn how to make decisions by detecting patterns in those humans have made, putting much larger swathes of the human workforce at risk. Is it time to follow the example of the Luddites and form a mob?
We’ve been here before. Examining the evolution of the various segments of the US labour force from 1800 to 1980, the effects of the industrial revolutions can clearly be seen as the majority of the workforce moves from farm to factory in less than 100 years. The Luddites were quickly proved wrong to challenge the advance of technology in early 19th century Britain, just as those worrying about robotic advances will likely eventually be proved wrong in the modern day.
This is not to say that advances in artificial intelligence and robotic application will not cause problems in the short term. Technological development and diffusion is speeding up, allowing education systems and workforces less breathing space to adapt. Meanwhile, some fear this new technology’s tendency towards conferring monopolistic power on the early movers or investors. Will robotics worsen the divide between rich and poor?
Mankind’s ability to invent, apply and get better at using new technology is at the heart of the improvements in living standards evident over the centuries of recorded human history. In his book Guns, Germs and Steel, Jared Diamond suggests that the moment a society could afford to spare some of its citizens from the relentless hunt for food was the moment that mankind started to innovate more meaningfully, resulting in massive, continuous and broad based improvements in living standards. Diamond sees a range of largely environmental factors allowing the Eurasians to pursue this path several millennia earlier than some of their American brethren. The astonishing slaughter of several thousand of Atahualpa’s Inca army at the hands of less than 200 of Francisco Pizarro’s technologically superior conquistadores at the Battle of Cajamarca in 1532 provides some testament to this developmental gap.
By 2016, there are expected to be 3.4 billion internet users, just less than half of the world’s projected population (United Nations). In smart phones, tablets and internet access, the ongoing technological revolution will eventually put the means of production within almost everyone’s reach, freeing up labour to pursue more creative avenues. It seems impossible to imagine that this combination will not help further unlock human kind’s creative and productive potential.
The other point worth bearing in mind is that most of us now work in jobs that did not exist 100 years ago, the same will likely be true in another 100 years. The education system and labour force will need to adapt, but that has always been the case. Some countries will feel the need to lavish greater protection on their labour force; however, shackling the forces of creative destruction tends to lead only to less dynamism and a more unbalanced labour force. The number of countries currently trying to tackle politically unpopular labour market reforms, from Japan to Italy, perhaps provides some evidence that economies, and wider living standards, benefit from a fluid labour market, where human capital can be reallocated rapidly to create new fields and jobs.
Fears about future productivity and how the labour force will adapt are central to the current narrative around economies and markets. The idea that we’ve somehow reached the limits of our productive potential is part of the force weighing on long bond yields.
Conversely a belief that mankind is nowhere near finished on the journey that has taken us from small bands of hunter gatherers to a sophisticated and globally integrated society, is central to the idea that equities have a place in portfolios over the long term. A lifetime bet on equity markets essentially represents a call option on increasing human productivity. As mentioned above, through an economic cycle, equities tend to swing between extremely expensive and extremely inexpensive. Right now we would see equities as neither. Developed equities have rallied a long way from the dark days of 2009 and, as interest rises in much of the Western world loom larger, further valuation based gains seem increasingly unlikely. However, we still see the world continuing to generate sufficient forward momentum for the corporate sector to cover its fixed costs. If that is the case then margins will likely stay more or less where they are and earnings growth will drive equity markets higher. The ride will not be smooth, volatility will pick up from here and it’s hard to see us getting through the second half of the year without at least one 10% plus pull back. That doesn’t mean you should try and time it, but clients should be well prepared for it.
Other things to consider
Those investors looking for a more specific angle with which to play this theme could do worse than consider an investment in the quoted technology sector. In some sense, an investment in technology shares represents a more concentrated call option on mankind’s likely continuing technological innovation. That call option is actually not that expensively priced right now.
This is a dynamic sector where investors should beware attempts to stock pick. Barriers to entry are mostly low in an industry where a large part of the high fixed cost manufacturing base has been outsourced to contractors resulting in an almost uniquely competitive backdrop.
As a result of this fluid, complex and fast moving backdrop, we suspect that investors are better off leaving this to actively managed sector specialist funds or even passive sector ETF exposure (dependent on investment personality). Alongside an inexpensive valuation, looming interest rate rises could see the sector enjoy some relative benefit from its largely pristine aggregate balance sheet.
A further tailwind from the expected pick up in corporate capital expenditure provides a more immediate reason for investment, but, as suggested above, this is a sector that will also likely continue to provide attractive returns over the very long term.