Welcome to the revolution: Investing amid an AI inflection point

The following is an extract from our latest CIO Outlook.

As investors have remained transfixed this year on the outlook for global growth and inflation, we have become increasingly focused on a theme that could reshape not just the investment landscape but almost every facet of our lives.

The explosive launch of ChatGPT in late 2022 highlighted the immense potential of generative artificial intelligence (AI). This is a type of AI that processes data to create new content – from text, to code, to molecular design and even art.

We have been well aware of AI for years. But the ability to generate material indistinguishable from that created by people, at almost unimaginably greater speed, suggests we have reached an inflection point. This places us firmly on the cusp of a new age of innovation.

And so, amid the relentless parsing of economic data and central bank interventions, markets have displayed a growing mania for the technology, without which year-to-date returns on the S&P 500 index, for example, would look decidedly less rosy.

Profound challenges

There are already many good papers in existence that outline how AI works and discuss its various applications. Our latest CIO outlook builds on that work, including our own analysis.[1]  Rather than offering another explanation, teams from across will LGIM assess the key implications of the technology for our clients.

Our key takeaways include:

• Some companies are likely to find their business models profoundly challenged, just as others gain from AI-driven efficiencies
• Equity indices are more likely beneficiaries than credit markets
• The cycle of more data leading to more sophisticated models means the rate of change should continue to surprise
• The information and computing power required are likely to boost the prospects for data centres and renewable electricity generation

We also touch on the macroeconomic implications, arguing there’s a strong case for tempering enthusiasm over the boost to growth, given the countervailing force of ageing demographics.

And because AI is as likely to disrupt our own industry of asset management as any other, we lift the veil on research our traders have undertaken to assess how the technology could deliver long-term benefits for clients, by slashing the time spent on ‘low-touch’ trades.

Development and deployment

Just as this new industrial revolution based around human-AI collaboration is ushering in vast opportunities, it also presents manifold risks. These range from the economic, given the potential scale of disruption, to the political, given the power now available to those who wish to sway elections through disinformation.

We are particularly attuned to these risks, as well as others that arise from questions of transparency, accountability and bias, in light of our purpose: to create a better future through responsible investing.

So in our latest outlook, we highlight the approach taken by LGIM’s Investment Stewardship team to engaging with companies on the safe development and deployment of AI.

More broadly, the salience of AI as a trend underscores the utility of taking a thematic approach to markets in general, given that this is but one of several structural changes underway – to which we will have to adapt on behalf of our clients and future generations.

The above is an extract from our latest CIO Outlook.

[1] See Artificial intelligence, investing and you, Which industries will AI upend? We asked ChatGPT, How is AI changing cyber security? and our Q1 Active Insights