AI – Rise of the Machines

Microsoft co-founder Bill Gates recently stated the development of artificial intelligence (AI) is the most important technological advance in decades.

In a recent blog Gates called it as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. “It will change the way people work, learn, travel, get healthcare and communicate with one another.” He was talking about ChatGPT, an AI chatbot which is programmed to answer questions online using natural, human-like language. Earlier this year, the team behind ChatGPT received a multi-billion-dollar investment from Microsoft – where Bill Gates still serves as a consultant. However, it is not the only AI-powered chatbot available as Alphabet’s Google has launched its rival AI chatbot, Bard, although its shares fell after an embarrassing glitch at the launch presentation.

AI may transform the efficiency of some businesses particularly those involving repetitive tasks such as insurance claims, paper work and note-taking. Bill Gates believes AI will be especially important for poor countries and healthcare. Many people in poor countries never get to see a doctor and AI will help health workers they do see become more productive.

However, AI could also be disruptive for some sectors. For example, US education services provider Chegg Inc recently saw $1bn knocked off its market value as the company announced in its latest results that it had seen ‘a significant spike in student interest in ChatGPT. We now believe it is having an impact on our new customer growth rate.’  We notice some investment analysts are already starting to highlight companies whose business models they believe might be vulnerable from AI and expect more companies to outline the risks and opportunities from AI in the months ahead, in trading updates and results.

Microsoft recently reported better results than expected, but along with investing in ChatGPT is rolling out Bing Chat, an internet search chatbot in a bid to keep pace with Google. It has also frozen pay for all full-time workers this year to help it navigate challenging economic conditions, but also to generate ‘enough yield’ to invest in a major platform shift to AI. 

Some well-known tech experts are now beginning to have misgivings about AI. Elon Musk has expressed his concerns about the risks from AI. Now, British scientist Geoffrey Hinton, widely seen as the godfather of AI has announced his resignation from Google, warning about the growing dangers from developments in the field and issued the warning that AI chatbots ‘may soon be more intelligent than us.’ 

What have we been watching?

Conversations in Washington about the US debt ceiling continued to overshadow markets. If the debt ceiling is not raised then the US, in theory, could default on its borrowing as soon as the 1^st June. US Treasury Secretary Janet Yellen said a default ‘would spark a global downturn that would set us back much further.’  This has created another headwind just as some of the earlier optimism that the Federal Reserve (Fed) is willing to pause interest rate hikes had evaporated. However, US inflation was in line with expectations which has provided a glimmer of hope of a ‘Fed pause.’ In the meantime, US banks are tightening credit standards in the wake of the banking crisis and in anticipation of stricter regulations. As a result of this and the Fed rate hikes, markets appear to be considering the likelihood of a mild US recession, while hoping for a soft landing. Despite the latest Bank of England interest rate hike Sterling edged back below $1.25.

Meanwhile, China was expected to bolster global economic growth in 2023 as it emerged from lockdown but the ‘bounce-back’ does not appear as strong as hoped for judging by the latest trade data. At least there was another crumb of comfort on the global inflation outlook. Food prices have been one of the ‘sticky’ inflation components and global fertiliser business K&S lowered profit guidance due to falling potash prices. Lower fertiliser and energy costs should be helpful for food producers.      

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In the UK, average house prices dipped 0.3% month-on-month in April according to mortgage lender Halifax. The Bank of England (BOE) increased interest rates by 0.25% to 4.5% as widely expected by a vote of 7-2. The BoE did raise its short-term inflation outlook due to ‘stickier’ food prices and said  further interest rate increases would be required if there were signs that inflation proves to be longer lasting. However, it noted signs that the UK jobs market has started to loosen while it had seen only a small economic impact from the banking crisis. The most eye-catching feature of the announcement was an upward revision to the GDP projections. This has been driven by falling energy prices and the BoE has even raised it 2025 UK economic growth forecast up from 0.25% to 0.75%. 

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In Europe, the commercial property sector was under pressure. This followed the news that Swedish property company SBB had its debt downgraded to ‘junk’ status by credit rating agencies.

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US inflation data for April was in line with expectations, with annualised CPI at 4.9% and core inflation at 5.5%. The big takeaway from the data seemed to be the slowdown in core services, excluding rent while food prices were unchanged for a second straight month. The inflation data is supportive of ‘Fed pause’ expectations and the Fed’s higher-for-longer messaging despite many in the market expecting interest rate cuts in the second half of 2023. Meanwhile, new jobless claims jumped to an 18-month high last week suggesting labour conditions may be softening.

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China’s bounce back from lockdown does not appear as strong as hoped for judging by the latest trade data. China’s exports grew by 16.8% in April but this was down from 23.4% in March. China’s imports declined by 0.8% having grown by 6.8% in the previous month. Unlike in other major economies which exited lockdown, China has not seen a pick-up in inflation, indeed it slowed in April to 0.1% further raising concerns over the strength of local demand. Will Beijing provide new stimulus or allow the economy to slow?

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Brent oil reversed its tentative rally edging back to $74 as US oil inventories rose unexpectedly.

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Finally, everyone knows a new car starts to lose value the moment you drive away from the dealer’s forecourt. However, a new study by ChooseMrCar.com suggests that EVs could depreciate faster than petrol cars. Between 2020 and 2023 the study found EVs lost over 50% of their value compared with 37% for petrol vehicles. EV market penetration is increasing in the UK but not quite as quickly as some had hoped. Could loss of value be another possible factor besides charge point anxiety?

 

Read Last Week’s Alpha Bites – How do you like your chips?

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.