David Coombs on 'polar opposites' inflation vs AI

All anyone can talk about these days is AI and inflation, which is interesting because they are, in many respects, polar opposites, says David Coombs, Rathbone Multi-Asset Portfolios, lead fund manager.

One is shaping up to be a very long-term phenomenon and the other is, in the grand scheme of things, a short-term disruption. That they should be bouncing round everyone's conversations at exactly the same time is proof that the cosmos has a sense of humour.

Now, ‘long-term' and ‘short-term' are relative terms. We think inflation will continue to fall sharply around the world over the course of this year, yet there's a good chance that it will still be above central bankers' 2% targets well into 2024. There has been so much disruption to labour markets, work practices, trade and supply chains that it will take some time to work its way to an equilibrium.

AI, on the other hand, could have long-lasting repercussions on every thread of our lives for decades to come. Rather than a wannabe Skynet - which the doom-mongers fear - we think AI will become just another digital tool that will fuse into how we live and work.

Like the internet, mobile phones and tailor-made Spotify playlists, it will be remarkable at first and then become part of the furniture. Yet it will remove a lot of drudgery from our lives. Remember leather-bound dictionaries? Remember hours waiting around at the wrong pub to meet your mates? Remember the family outing to the video store only to find all the copies of the latest film were already on loan? AI has the potential to remove drudgery at a scale that perhaps eclipses even the internet itself.

What's scarier than robot lawyers?

All indications are that AI can do many tasks that are considered reasonable jobs for a whole lot of people. Even jobs that people have spent a lot of time studying for: doctors, engineers, accountants, and yes, even fund managers. If this comes to pass, the effects on society will be great indeed. However, nothing happens overnight. Like all technology, it will be iterative, and it will come in stops and starts. We have no greater idea of the final impact of AI in, 10, 20, 50 years' time than any of you. 

But, like the other life-changing inventions of the past - such as the automobile, the internet and the spinning jenny of textiles fame - AI should be deflationary. It should greatly reduce the cost of services that it can render. That's bad news for those who are currently paid a lot to do something that a computer can do much more cheaply, but it's good news for society, because it means we can produce more with less resources.

Lawyers get paid an awful lot to proofread extraordinarily long documents, investment bankers spend a lot of time creating Powerpoint slides and doctors spend most of their life typing with two index fingers. If a smart computer can do these sorts of menial tasks instantly and accurately, that saves many people weekly migraines and cuts costs for the customer. That means more time for people to spend doing things that actually bring them joy or money.

We've already found that some companies we own could benefit from using AI to enhance their products and services for their customers. These prospects are exciting, but we remain grounded in our expectations and will wait to ‘see the money' before we factor these drivers into our analysis. Many of our investments, such as commercial hydraulic gases supplier Linde and pest control company Rentokil Initial, are already using AI to improve productivity. We are watching the results closely.

As always with the Next Big Thing, it's advisable to avoid the hype and excitable forecasts. Focus instead on the real world issues affecting the wider economic environment (does AI increase the natural rate of unemployment, for example) and the company-specific (if everyone uses AI assistants to get their info, does that make Google Search obsolete?). 

A few small tweaks

As the yield of 10-year UK government bonds rose above 3.75% in May we started to buy the UK Treasury 0.875% 2033, adding more as the yield rose above 4.2% later in the month. At the same time, we added to the UK Treasury 3.75% 2052, which yielded roughly 4.5%. If you have even a scrap of faith in inflation-targeting as a concept then getting roughly 2% more than the long-term inflation rate over the next decade seems a reasonable investment. Especially as these bonds also offer portfolio protection at the same time: they should hold up if stock markets sink because of recession.

We have a few medical technology companies throughout our funds, as we think they offer solutions to many health problems that will proliferate as the world's population becomes older and wealthier. We added another in May. Boston Scientific is best known for creating small steel-latticed tubes (stents) coated in a drug to unclog arteries and keep them free of plaque.

However, it has many other products that help doctors care for patients with all sorts of other blockages, as well as tools for operations and general health monitoring. Boston Scientific's latest success is its Watchman device. With more than a passing resemblance to a metal jellyfish, the Watchman is inserted into a chamber of the heart to reduce the chance of blood-clot strokes for people with an irregular heartbeat. We think, with populations ageing, there should be opportunity for Boston Scientific to keep growing. 

Holding pattern

Economic data is so varied that you could knit together an argument for anything from economic apocalypse to soft landing. In reality, no one knows. Most people have been in a holding pattern for months - ourselves included - as we wait for the paths of inflation and GDP growth to show themselves.

The EU is technically in recession, having posted two 0.1% quarter-on-quarter falls in GDP. Yet wages there are growing at 5% and employment is rising. The US would already be in recession if the weight of economists' expectations counted for anything.

A mild American downturn seems the most likely outcome, yet it has been just over the horizon for many months now and is still yet to arrive. Investment is flowing into plant, buildings and machinery, no doubt buoyed by the Inflation Reduction Act's tax credits for clean energy technology and reshoring.

Potential dark horses for economic activity are personal subsidies of up to $8,000 for families to buy electric or hydrogen-powered cars and another $8,000 to install heat pumps and insulate their homes. These are relatively small sums, but if it encourages many people to take them up, then it could boost businesses around the country and cut future household bills into the bargain. 

Like we said before: there are simply too many countervailing winds whipping round our ears at the moment to determine what the future will bring. We're focusing on keeping our portfolio as prepared as possible for whatever comes over the horizon.

By David Coombs, Rathbone Multi-Asset Portfolios, lead fund manager.