After QE, could AI be the next trigger for the Bull Market ?

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

I came across an interesting Accenture study

Artificial Intelligence is expected to drive a new wave of rising productivity, similar to what happened during the Industrial Revolution. In numerous economies, especially developed countries, increases in capital and labor are no longer able to drive decent levels of growth. Artificial Intelligence is seen as a new factor of production that can change the situation by transforming the basis of economic growth.

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You can read the full research here which forecasts a huge jump in global productivity and gross domestic product.

Diminishing returns on Liquidity

The past decade has seen primarily liquidity and buy-back driven bull markets. Money was cheap with Central Bank led Quantitative Easing, which pushed up stock prices. As is typical of central planning – the law of unintended consequences kicked in – and QE which was meant to loosen monetary policy and spur lending, led to flatter yield curves which together with increased regulation led to diminishing returns on bank lending. The result of this glut of capital was deflation, in place of inflation.

Instead of chasing commodities and causing inflation, all this extra printed money, began chasing select asset classes – causing asset bubbles (think Unicorns) – and this trend of money chasing assets will drive asset returns lower into the near future, leading to pressures on cutting costs.

AI will spur Earnings Growth

The Liquidity driven bull market needs earnings growth to catch up and sustain historically high valuations. Artificial Intelligence and Robotics, it is hoped, will boost gross domestic product and provide a fresh trigger to leading global markets – which in turn will not only sustain current prices but may lead to a fresh re-rating of stock valuations.

Universal Basic Income

AI and automation will lead to a temporary loss of the labour workforce, and may even lead to a permanent displacement – as corporations compete with each other to increase earnings and productivity. Remember how many jobs lost to the 2008 recession never returned as companies adopted to a “new normal” of efficiency?

We are moving towards a future where robots pay tax and governments scheme to keep the proletariat busy and calm through Universal Basic Income – or providing fixed monthly wages in return of the ability to fog a mirror (being alive). UBI pilots are already being tested in Scandanavian nations and there are murmurs of it being implemented in India as well.

Productivity may be spurred by AI, as the Accenture study suggests but to what extent will Consumption – being the C in the GDP equation – take a hit?

The governments have read the writing on the wall and are preparing for the coming jobless future. Universal Basic Income will be used to keep consumption going at a moderate pace, but it’s factor in GDP should take secondary position to productivity and public investments going forward. This new paradigm of growth will be very different from the Industrial Revolution and modern economies. It may lead to larger inequalities in wealth between the owners of Capital and Labor and new socio-economic imbalances never witnessed before.

Impact on the Indian Stock Market

India has only a handful of listed companies in the space that can serve as a direct proxy to play this secular AI and automation trend. One of which is Honeywell Automation (NSE: HONAUT) which makes self-checkout machines for retail stores and provides robotics solutions across industries, from Oil and Gas to Aerospace.

Self-driving cars will disrupt the supply chain of automobile spare parts. Companies like Pricol (NSE: PRICOLLTD) once famous for making dashboard instruments for two-wheelers have exited the space in anticipation of modern digital interfaces eating up the market.

I would be bullish on companies making braking systems such as Wabco (NSE: WABCOINDIA). Self-driven cars will face challenges in adapting to tight safety norms and road conditions, especially with increasing traffic congestion in India.

Unfortunately no Indian IT company will be a market leader in AI as it requires scale, R&D, access to unstructured data and IP that no Indian company of scale can quickly adapt to. Google, IBM, Apple, Salesforce and Microsoft will lead the coming AI wave but some midcap Indian IT companies that serve as vendors or partners to their product suites may benefit. Also keep an eye on companies in OEM and Automobile software.

Breakthroughs in computing and AI will also be a catalyst in personalized medicine which will spur the development of drugs. Indian Pharma companies are well positioned to be 2nd tier vendors to large global players that will lead this trend. Together with the Auto Industry, Healthcare I feel is a candidate for major disruption across the value chain – from insurance to hospital chains.

DISCLAIMER:

I do not own any stocks of the companies mentioned in this blog post. I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

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