What does the "rise of the robots" mean for asset prices?

Alice Leedale, Fixed Income Strategist at Schroders.

When we look at the immense advancement in automation, we can see how the world could be headed for a prosperous future in terms of technology growth.

Reuters, the news agency, has recently revealed that as many as 400 of its news stories are written every day by robots. Meanwhile, IBM has developed an artificial intelligence “engine” which is beating human oncology specialists in its diagnosis and treatment of cancer in nearly one in three cases. Alice Leedale, Fixed Income Strategist at Schroders, looks at the robot age and what it might mean for investors.

Is the future bright or bleak?

With developments like these, it isn’t hard to paint a bleak picture of further breath-taking advances in automation creating an increasingly divided society, where a so-called “second machine age” prompts mass displacement of labour accompanied by an increasingly wealthy robot-owning class. Yet the history of technological change offers a decidedly more sanguine prognosis.

According to Leedale, while foreseeable transitional costs will be incurred, the latest Schroders research suggests that in the long term the rise of robots will not cause widespread unemployment or vast inequality.

The effects so far

Some may argue that the negative effects of automation are already becoming apparent in the US, where recent decades have seen a “hollowing out” of manufacturing employment, driven by technology and globalisation. At present automation is also making rapid advancements in both low-skilled as well as high-skilled service roles that have previously been set aside for white-collar workers (as the Reuters and IBM examples highlight). Whether we are in South Africa or China, it’s important as human beings to become adaptable as well as re-skill ourselves.

The resultant rise in inequality could dampen consumer demand, put pressure on government finances, and even precipitate a further lurch towards populism in the developed world.

Hope from history

According to Leedale, “The history of technological change offers plenty of hope. Over the course of the 20th century, not only has technology led to huge productivity improvements that raised living standards for all, it has almost certainly created more jobs than it has destroyed. Moreover, an automation revolution should bring a much-needed boost to productivity, raising trend growth rates.

Such a fillip would not only help offset recent poor productivity growth in many countries, but also the downward pressure on growth from ageing populations. This is particularly true in developed countries, which are more likely to have the resources and expertise to embrace the automation technology.

If this outlook proves accurate, it could challenge the conventional wisdom that developing countries with large, young populations have significant demographic advantages over developed economies

Techno-dystopia vs positive productivity shock

“We accept, however, that firm conclusions are difficult to make. Given the huge uncertainties, we prefer to look at a range of potential outcomes between two extremes: “techno-dystopia”, in which high unemployment and rising inequality prevail, and “positive productivity shock”, where automation facilitates a widely-distributed productivity boom”, states Leedale.

She emphasizes that sequencing is substantial and the world may rapidly move towards “techno-dystopia” before labour markets and legislators are able to adjust.

The investment angle

Looking at techno-dystopia from an investment standpoint, it represents a sphere where many of the existing issues influencing the global economy- including weak demand, subdued inflation, low wage growth, and inequality- are magnified. With inflation remaining permanently lower, developed world bond yields would likely fall further. This is because the premium that bond investors typically demand to compensate them for the risk of inflation would be greatly reduced.

“Carry trades (i.e targeting the return obtained from just holding an asset), particularly corporate bonds, would remain in vogue. But flare-ups of populism and political uncertainty could see risk assets (i.e equities, commodities, corporate bonds, real estate, or any asset that is not considered risk-free) suffer periodically”, says Leedale.

If we are optimistic and the global economy is able to surface from its current state due to the rise of automation and technological advancement, developed bond yields should finally break out upward from their five-year range, and improved sentiment could even drive buoyant, demand-driven, inflation. In a sense that would represent an amplification of the “reflation trade” witnessed following the election of President Trump.

This environment should encourage the potential for growth in developed world risk assets, while commodities and inflation-protected assets similarly do well. It would certainly warrant an underweight (or short) position in developed world bonds.

“To determine which way the wind is blowing, investors will need to keep a close eye on how policymakers and the beneficiaries of automation rise to the challenge of spreading its financial benefits more widely and be ready to act accordingly”, says Leedale.