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The modern world is characterised by complexity and saturated with data and opinions on everything from geopolitics to economic and social issues. Much of it is contradictory
How should investors rethink the likely impacts of key megatrends – deglobalisation, generative artificial intelligence, ageing populations and the energy transition?
The instinctive response is to accelerate as the world speeds up. But by stepping back to reevaluate the world, investors can better identify opportunity amid volatility.
Investors have access to plentiful information – and a gauntlet of conflicting views. Gaining clarity on pivotal forces shaping the world, from geopolitics to artificial intelligence (AI) and climate, can best be achieved by discerning data from noise. By rethinking adversity, opportunities emerge.
Get ahead by slowing down
The world in 2024 is incredibly noisy. Every aspect of modern life is swathed in complexity, from financial markets to geopolitics and social issues. Information is everywhere. And it is leveraged to inform an array of competing perspectives.
This is unhelpful for investors, who are faced with trying to understand how a series of megatrends – stemming from geopolitics, AI and climate – are impacting the companies and markets they invest in. Typically, most views focus either on their negative potential impacts or the bright future they are poised to usher in.
How can investors understand how these phenomena are shaping the world? In our view, it’s an opportune time to slow down, step back and rethink these megatrends. Only then can investors gain the clarity to get ahead.
Geopolitics: headwind or investment opportunity?
Will US-China trade wars stymie growth and exacerbate geopolitical risk, or does the highly specialised, global supply chain for advanced semiconductors, plus onshoring efforts, create significant investment opportunities?
Generative AI (gen AI) is a step-change technology: its ability to identify patterns in unstructured data is opening possibilities that are only beginning to be exploited. Whereas traditional data processing can only make use of the 20% of information that exists as structured data, gen AI can harness the other 80% with the promise of unlocking huge efficiency gains. In time, we expect the technology to permeate the economy for uses including agricultural management, assistant humanoids and robotic surgery.
We estimate that only 12% of servers globally will be AI-powered by the end of 2025, leaving a long pathway for capex and associated growth opportunities in the coming years
The world is currently in the first phase of gen AI adoption, characterised largely by server upgrades and conversational outputs. Installing gen AI servers costs up to six times more than traditional server upgrades, but productivity gains mean that revenues could rise four to five times higher1.
Hyperscalers – companies like Microsoft, Google and Amazon1,2 – are leading adopters, vying to make intelligent automation key to business productivity and efficiency. Even as they progress and other firms follow, we estimate that only 12% of servers globally will be AI-powered by the end of 2025, leaving a long pathway for capex and associated growth opportunities in the coming years.
The supply chain for advanced chips crosses regions, characterised by Taiwanese foundries, Dutch lithography and Korean memory expertise. However, governments are offering a range of subsidies and tax breaks to encourage firms to move or expand operations within their territories. Such onshoring efforts form one of the key factors investors need to watch as the industry accelerates.
US incentives, for example, provide over USD 52 billion in tax credits to boost research, development and production, and to support the construction and improvement of manufacturing facilities. It has incentivised TSMC and Samsung1,2 to build foundries in Arizona and Texas, respectively.
The battle for technological superiority is in full swing, but is gen AI itself a positive or negative disruptive force?
Historically, technology has been the core enabler of productivity growth, with the internal combustion engine, electricity and computing being prime examples. And increasing productivity is a key issue, given that the next five decades will see global workforces shrink by approximately 4-5% every five years.
From the 19th century Luddites’ objection to automation in the English textile industry onwards, however, technology has always been seen by some as a potential threat. Gen AI is no exception; a recent survey found that more than two-thirds of European workers fear job losses due to AI.
Industry disruption is also certain: the International Monetary Fund concluded that 60% of jobs in advanced economies will be affected by the technology, with around half being negatively impacted. Furthermore, many of these will be in white-collar professions rather than those susceptible to previous waves of automation. On the flip side, many experts predict the gen AI revolution will create more jobs than it destroys.
Chatbots are our first interaction with the technology. In the future, gen AI will progressively be employed for more complex routine tasks, such as bookkeeping and conveyancing. However, in more complex and creative jobs, it will be used as a tool to augment skills of human workers, rather than replacing them. Examples include psychologists, architects, economists and artists.
Healthcare workers will likely gain opportunities to harness the technology. By leveraging raw data, gen AI can accelerate drug research, support medical image assessment, and facilitate personalised prevention and treatment plans. By keeping people fit to work for longer, this should help the rise of preventative medicine, prolong and improve quality of life and compensate for the economic impact of ageing populations.
Until recently, government net-zero commitments and the growth in renewables appeared to herald an accelerating energy transition. But with doubt among scientists about whether limiting global warming to 1.5 degrees Celsius by 2030 is still a realistic goal, some argue if the sustainability transition really is unstoppable or existentially threatened.
In our view, while investors shouldn’t ignore the possibility of short-term headwinds slowing the energy transition, the prevailing direction favours sustainability over the long term. Renewables are already embedded in the energy mix of countries across the globe, yet they are far from reaching the limit of their potential.
To make sense of the evolving investment environment, it’s necessary to shut out the noise, take a step back, and separate fact from opinion
As abundant sources of clean energy, wind and solar power are clearly attractive propositions to help drive the sustainability transition. But a number of factors make solar, in particular, best positioned to compete with other forms of energy on their own terms, in our view. They are:
Cost. Utility-scale solar now offers the lowest levelised cost of electricity3 of any power source – and our analysis indicates it will get even cheaper.
Policy ambition. Supportive policymaking and planning reform in key markets including China, the US and the European Union are creating a fertile environment for significant solar growth.
Deployment ability. Solar is more efficient in terms of land use than other energy sources, particularly as it can be deployed on buildings and land used for other purposes.
Modularity and scalability. All solar cells are standardised products made in basically the same way and can be easily combined at almost any scale.
Supply-chain resilience. While concentration of the solar supply chain in China is a concern, planned growth in polysilicon capacity far exceeds our strong forecast for solar installations.
Raw materials availability. Silicon, the raw material used to make the polysilicon for solar cells, is the second most abundant material on earth after oxygen.
As a result of these factors, we expect global solar capacity additions to grow at a rate of 16% from 2023 to 2030, driving total capacity growth of 307%4.
To make sense of the evolving investment environment, it’s necessary to shut out the noise, take a step back, and separate fact from opinion. Only then is it possible to develop informed convictions about how best to invest for the future.
For example, in the geopolitical new order, how will onshoring efforts and trading policies for advanced semiconductors influence the global supply chain? Also, looking past the extremely negative or positive renderings of gen AI’s potential impacts on society, what are the practical ways that the technology can be applied to improve services and augment human work across the economy, from medical treatments to agricultural management?
By focussing on the best evidence, we find the clarity to rethink the world and then fortify our convictions. Only then do we invest
Similarly, it is easy to be distracted by partisan politics and slower-than-hoped progress on climate mitigation. This fails to identify solar’s bright prospects in global energy systems – due as much to its favourable economics, modularity and scalability as its role in the net-zero transition.
As part of an institution with 228 years of experience, we’ve learned to ignore the noise, discern wisdom from folly, and identify opportunity in the face of adversity. By focussing on the best evidence, we find the clarity to rethink the world and then fortify our convictions. Only then do we invest.
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1 LOIM Asia Equity analysis as at August 2024. For illustrative purposes only. 2 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document. 3 The levelised cost of electricity (LCOE) can be defined as the average cost per unit of electricity generated based on the total cost of building and operating a generating asset. 4 BloombergNEF, LOIM at July 2024.
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This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
