Investment Strategy  

27/02/2017

More than human: Positioning portfolios for the rise of the robots

Stéphane Monier Head of Investments, Lombard Odier Private Bank

By Stéphane Monier, Chief Investment Officer, Lombard Odier Private Bank

As investors, we are committed to ensuring that portfolios are positioned for the disruptive economic reality of robots and the new ways that wealth will be created.

So as we look towards the dawn of the fourth industrial revolution we ask what we can learn from the first three – steam power of the 1700s, electricity of the 1800s and digitisation of 1900s – and whether this time will, indeed, be as different as many commentators claim.

The imminent boom in automation will mean different things for advanced and developing economies. That said, the market can no longer ignore the onslaught of research suggesting that up to half of workers in the developed world are vulnerable to the threat of automation and artificial intelligence (AI)1. We believe the global economy is on the threshold of a revolution that could prove as far-reaching as the railroads of the 1700s and the semiconductor chip of the 1960s.

In 2013, a seminal study carried out by Carl Frey and Michael Osborne at Oxford University2 documented the impact of computerisation on 702 occupations in the US. Their research concluded that 47% of US workers are vulnerable to displacement by some variant of machine.

A collar-blind revolution
While the market’s response to robotics continues to swing between optimism, defensiveness, and fear, consensus is unifying around the view that the global economy is on the verge of a fourth industrial revolution. But humans have, however, lived alongside machines for centuries; so what makes this transition different from those that have gone before?
The first noticeable difference is the speed at which automation will transform the way we work. The second difference is that the robots of today will no longer respect the colour of your collar. All shades of the professional community – from blue collar to white – will be impacted in a way that differs from the industrial revolutions of the past. The intellectuals and the experts – from doctors to economists to academics – now fall into the 47% that Frey and Osborne have identified. This comes as machines take on such tasks as reading radiographs to identify cancer, dispensing investment advice by pinpointing trends, and writing reports not dissimilar to the one you’re reading now. In these and many other examples, machines can carry out the said tasks to a higher degree of accuracy, with greater speed and, of course, less cost than humans.

Breakthroughs in artificial intelligence, voice recognition and machine learning are likely to transform the way we interact with knowledge workers, i.e. specialists and experts that were once considered immune to automation. Such tools are poised to remodel the way that highly-skilled people work and how their time is organised. According to McKinsey Global Insights, by 2025, the potential economic impact of the automation of knowledge work will lie in the region of USD 5-7 trillion globally3.
As witnessed in the 18th and 19th centuries, machine revolutions almost always trigger a tug of war between economic gain and social disruption – shifting wealth, realigning workforces, forcing through new skills and, ultimately, giving rise to new kinds of insecurities.

Social strife: the side effects of automation
In the 1930s, as air travel and the automobile began transforming the industrial landscape, economist John Maynard Keynes coined the term technology unemployment.
There is little dispute that automation will mean job losses in the short term. Several governments, including those of Finland and the US have mooted plans to introduce new forms of welfare for workers who lose their jobs to machines. As France prepares for a hard-fought presidential election, at recent primaries, some candidates have aired support for a universal benefit. This would guarantee a minimum income of €750 for every adult in the country on the expectation that automation is poised to wipe out 3 million jobs.

Meanwhile, as mass immigration and offshoring is blamed for an increasingly fractured employment market, research by Ball State University found that the vast majority of jobs in the developed world are being lost to automation not trade. According to the findings, 10% of job losses in the industrial sectors have resulted from trade and outsourcing. An astounding 90% are the result of productivity-related changes, almost entirely driven by AI.

It is, indeed, no coincidence that the current surge in support for populist politics is unfolding in the shadow of a workplace revolution triggered by automation. It is against this backdrop that wages have all but stagnated and wealth has continued to shift from the old industrial hubs to the likes of Silicon Valley.

Investment positioning
As AI threatens to shift the balance of wealth across economies, it is vital that one’s investment positioning follows suit. At Lombard Odier, we offer solutions for investors who wish to access the opportunities of automation by gaining exposure to the theme’s most attractive companies.

Lombard Odier’s technology analyst Marco Barresi, discusses his investment approach: “Firstly, we are always on the look-out for the unexpected. For example, RankBrain is a search algorithm developed by Google that has the ability to learn offline and improve itself in the same way that humans do. These innovations will not just transform the tech sector itself, but also the sectors that surround it. For example, the driverless automobile will not just change the landscape for investors in the tech industry but also the auto and transport sectors, energy, insurance, hospitality and consumer are all set to be heavily disrupted by this one innovation. So this is a really exciting time to be an investor.

“The tech sector in particular is at a turning point, playing host to a vast range of companies that are each at different stages of the adoption and monetisation curve. For example, in the area of cloud computing, there are many mainstream opportunities that already have strong franchises that generate cash flow. Alternatively, there are also a number of emerging technologies, e.g. in the internet of things that are still relatively immature, but are expected to be the drivers of the future.

“But, regardless of how exciting an opportunity might look, nothing is more important than the fundamentals: valuation, risk profile, competitive advantage etc. Arguably, the growth profile and strong expected future returns of the sector may, in some cases, justify the premium valuations.”

An economic growth spurt: the right side of the revolution
With more than five million human-based jobs likely to be taken over by machines during the course of the next three years , governments have a key role to play in ensuring that potentially disruptive technologies are integrated into the fabric of our economic and social lives.

The fourth industrial revolution will take place at a speed that will outpace all the revolutions that have gone before. But humans have an uncanny ability to adapt and upskill, moving to more specialised roles in their respective industries while leaving machines to carry out routine tasks more quickly, cost effectively and accurately than humans ever could. Rather than destroying jobs, automation will redefine the way we work, bolstering output and boosting demand. In the medium term, the most automated economies are likely to experience growth spurts as machines drive forward productivity, efficiency, and ultimately, human endeavour.

The big winners will, in our view, be the consumers and investors that position themselves on the right side of this revolution. Technologies such as 3D printing will allow individuals to make, at home, products that they once had to buy. The automation of knowledge work will allow non-experts to, at the click of a button, access personalised knowledge that they once had to queue, pay or study for.

For investors, the opportunities are vast as everything from mobile internet to autonomous vehicles drive markets towards new opportunities for growth. If this sounds familiar, it should. While every industrial revolution has disrupted the global economy in different ways, they always ultimately end in growth –there is no evidence that this time will be any different.

1 Rise of the Robots: Technology and the Threat of a Jobless Future (2015) by Martin Ford.
2  The future of employment: How susceptible are jobs to computerisation?, 2013. By Carl Benedikt Frey and Michael A. Osborne, Oxford University.
3  McKinsey Global Institute: Disruptive technologies, By James Manyika, Michael Chui et al, 2015.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier. Accordingly, it has not been in accordance with the Swiss Bankers Association Directives on the Independence of Financial Research or any other legal requirements designed to promote the independence of investment research. Any information contained in this document is not and should not be regarded as financial research for the purposes of the Swiss Bankers Association or any relevant regulatory body. Consequently, this document is not subject to any restriction on dealing head of the dissemination of investment research. Furthermore it is duly stressed that opinions expressed in this document may differ from the opinions expressed by other divisions of Lombard Odier, including its Financial Research Department. This document is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe to, purchase, sell or hold any security or financial instrument.

It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information contained herein do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the document or otherwise review it with your external tax advisors.

Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.

Past performance is no guarantee of current or future returns, and the investor may receive back less than he/she invested. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, Lombard Odier will be pleased to provide investors with more detailed information concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is realised and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. Lombard Odier may hold positions in securities as referred to in this document for and on behalf of its clients and/or such securities may be included in the portfolios of investment funds as managed by Lombard Odier or affiliated Group companies.

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