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AI, geopolitics, climate change: seeing the bigger picture as tectonic plates shift
The world is becoming noisier than ever. Our permanently connected and increasingly interconnected lives are filled with a cacophony of 24-hour news, opinions, predictions, advertisements, and political announcements. As the new and established media battle for viewers and advertising dollars, we are subjected to a growing chorus of competing megaphones.
The world is also changing more quickly than ever. Three tectonic plates are shifting, creating a new landscape for investors. The first is technology, with artificial intelligence (AI) now performing tasks we would not have thought possible as little as two years ago. What took more than 60 years to pass the Turing test1 has, since the launch of ChatGPT in November 2022, taken just 18 months to disrupt entire industries. The question on many lips – will AI be friend or foe?
The second is politics – in an unprecedented year of elections, countries containing more than half the total global population are going to the polls. In many places, populism is on the rise and the centre ground receding. In the US, economically and militarily the world’s most powerful nation, the spectre of a second Trump presidency brings many unknowns.
The third is climate change, which continues to accelerate. 2023 was the hottest year on record2 and, despite decades of international efforts to reduce greenhouse gas emissions (GHGs), we are still emitting more than ever3.
It’s only when you have the confidence to calmly step back that you can identify the fundamental systems changes that are occurring, and sift the essential insights from the white noise
For investors, it’s easy to feel that as the world speeds up, we must run faster. A quickly evolving macroeconomic environment can encourage hasty decision-making. At Lombard Odier, we take a different approach. More than 225 years of experience has taught us that if you are running as fast as the world, all you can do is keep up. It’s only when you have the confidence to calmly step back that you can identify the fundamental systems changes that are occurring, and sift the essential insights from the white noise. Only then can you have the clarity to get ahead.
For investors, the hype around AI has become deafening. In the US, the so-called ‘Magnificent 7’ stocks, boosted by AI buzz, have come to dominate the S&P500. Taken together, Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Nvidia represented more than 30% of the value of the entire index in 2023, and half the annual gain.
The warnings of doom have been equally loud. In 2013, one much-reported study found that up to 47% of US jobs were highly vulnerable to computer automation4; more recently, a report by investment bank Goldman Sachs warned that AI could replace 300 million full-time jobs globally5.
We are convinced AI will be a friend not a foe. Rather than replacing humans, AI will make us more efficient, more precise, and more productive
At Lombard Odier, we believe it is important to step back from both the hype and the prophecies of an employment apocalypse to see the bigger picture. Across the last 150 years, numerous technological advances have disrupted sectors or even our entire economy, and yet, throughout every disruption, productivity has risen and long-term job creation has outstripped short-term losses6.
We are convinced AI will be a friend not a foe. Rather than replacing humans, AI will make us more efficient, more precise, and more productive. In healthcare, for instance, AI is being used to improve the accuracy and speed of scan analysis7 and cut drug development times by as much as 90%8; software engineering is already seeing work times cut by more than half; while customer services could achieve productivity increases of up to 45%9, improving the customer experience at the same time10.
Market intelligence firm Grand View Research estimates that the global AI market – including software, hardware, and services – will reach a value of USD 1.8 trillion by 2030, seeing a compound annual growth rate of 36.6%.11 More broadly, professional services firm PWC estimates that AI could contribute USD 15.7 trillion to the global economy by 2030.12
‘Slowbalisation’, fragmentation, and re-industrialisation
In the aftermath of the 2008 financial crash, the global integration of trade that marked the 1990s and early 2000s slowed. More recently, following the unprecedented supply chain disruptions caused by the Covid pandemic, and the global fallout of Russia’s invasion of Ukraine, ‘slowbalisation’ has become fragmentation.
Competition between the world’s great powers, rather than diminishing investment opportunities, is merely reshaping where opportunity is to be found
Conventional wisdom warns that where globalisation led to greater than ever trade flows, the emergence of a multi-polar, less integrated world will mean reduced trade and investment. At Lombard Odier, we see things differently. Competition between the world’s great powers, rather than diminishing investment opportunities, is merely reshaping where opportunity is to be found, as Western businesses look to secure supply of energy and materials and re-build domestic manufacturing industries.
According to professional services firm Capgemini, 47% of large US and European firms have already invested in re-shoring their manufacturing, while a further 25% are developing a strategy. Together they plan to invest USD 3.4 trillion in re-industrialisation over just the next three years.13
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In many places this trend has government backing. In the US, for example, 2022’s CHIPS and Science Act – which aims to boost national security by rebuilding domestic semi-conductor manufacturing capacity – has already led to agreements for USD 55 billion in direct federal funding and loans, and catalysed a further USD 400 billion of private investment, supporting the creation of more than 100,000 jobs.14 Similarly, the European Commission recently announced funding of EUR 3.3 billion to boost the European battery manufacturing industry and reduce the bloc’s reliance on China15.
The total value of assets held by funds that include sustainability factors in their decision-making has risen almost 100-fold since 2006.16 In the decade to 2020, 60% of such funds outperformed their conventional peers.17 Despite this, sustainable investing – investing with the aim of achieving market outperformance whilst simultaneously driving the transition to a socially and environmentally sustainable economy – is being questioned.
While some are claiming that sustainable investing is on the wane, we believe the long-term imperative to invest sustainably has never been clearer
Recent high inflation and interest rates have reduced the profitability of some renewable energy projects, and accusations of greenwashing have beset the sector. Sustainable investing has also become politicised – in Europe, for instance, recent EU Parliament elections saw losses for green and liberal parties, with right-wing parties making gains by promising to push back on sustainable policies.
But while some are claiming that sustainable investing is on the wane, we believe the long-term imperative to invest sustainably has never been clearer. This can be seen most urgently in the world’s food systems, where record global temperatures and changing rainfall patterns are already impacting crop yields, threatening annual global food inflation of more than 3%18. Meanwhile across our energy systems, the transition to clean electricity production and consumption is also unleashing new sustainable investment opportunities, driven not by subsidies or policy, but by innovation and market forces. A recent slowdown in electric vehicle (EV) rollout, and a solar panel supply glut that has hit manufacturers, are examples of the natural cycles that new technologies are subject to as they achieve mass adoption.
But with renewables now the cheapest form of electricity generation19, and electrified end-user applications such as EVs and heat pumps as much as five times more efficient than their fossil fuel-powered predecessors20, we believe the global economy is on a one-way journey from oil and gas to zero-carbon electrification.
We are convinced that the accelerating changes the world is going through are not a signal of doom, but of opportunity
The rethink perspective
Our strength through more than forty financial crises and across more than two centuries has come from our willingness to diverge from the conventional wisdom, so that we can offer a fresh investment perspective for our clients. This approach – which we call ‘rethink everything®’ – is essential today, enabling us to step back from the noise and the ever-accelerating hype and warnings of doom, in order to clearly see the bigger picture.
Our deep understanding of the tectonic shifts of AI, geopolitical re-ordering, and climate change has led us to build our rethink investments framework, containing six high conviction themes that aim to mitigate portfolio risk and capitalise on the growth opportunities being created.
Across demographic changes and the longevity revolution; technology breakthroughs; infrastructure build-out; and the transition to a net-zero and nature-positive economy; we believe investors have a once-in-a-generation opportunity to build wealth for the long term while tackling some of the most pressing issues of our time. We are convinced that the accelerating changes the world is going through are not a signal of doom, but of opportunity.
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