Exploring Transformative Technologies En Route to Peak Altitude
Technological advances have long been key drivers of economic progress and corporate profitability. Artificial Intelligence and Blockchain-related applications have cornered a lot of the headlines, not all of them good, but confidence is growing in their potential.
Investors are increasingly abuzz around transformative technologies with the potential to disrupt the future of production and the nature of work. We believe two — Artificial Intelligence (AI) and Blockchain-related innovations — have passed a critical stage of discovery.
Artificial Intelligence: Large-language-model-based AI applications like ChatGPT and other generative AI tools have changed the nature of the game by providing a way for corporations and individuals to tap into AI with minimal investment. That almost half of S&P 500 companies mentioned AI in their most recent earnings transcripts illustrates just how importantly this is viewed by businesses.
Arguably, the greatest promise of AI lies in the potential to improve productivity across the entire economy, complementing human insights and labor as “co-pilots”. If previous experiences are anything to go by, the productivity gains and growth implications could be significant. That said, patience is warranted as, in the past, it has typically taken over a decade for benefits from the emergence of transformative technologies to be fully realized.
Within AI, we are seeing investors transition beyond hyper-scalers and semiconductors into infrastructure, as well as sector-specific applications. Our active equity analysts are identifying early movers in AI across industries, while our quantitative teams are incorporating AI to identify alpha signals and measure risk.
Blockchain: In a similar fashion to the AI experience, blockchain-based applications have expanded beyond cryptocurrencies into areas which early enthusiasts of distributed ledger technology (DLT) envisioned. The ability to “tokenize” assets has many potential benefits, not least of which is lower barriers to hard-to-access assets. But even bonds (and money market funds) and commodities can potentially benefit from the power of fractional ownership. One of our recent papers explores asset tokenization in greater detail.
Of survey respondents in 2024 have live DLT and digital asset projects 1
Digital asset issuance in bond markets (as of 12/31/2023)
On-chain digital assets can settle instantaneously 24 hours a day
As investments, we are more optimistic on the promises of digitization for traditional asset classes, but there is potential for fully digital assets such as cryptocurrencies and non-fungible tokens (NFTs) to surprise us. These are still speculative assets in our opinion; but if sufficient numbers of investors come to see them as a store of value, they could take on a similar role in portfolios as gold, whose practical uses are far less important to investors today than in the past.
Implications for Investors
As investors, we believe it’s helpful to think about the implications of AI, DLT, and other transformative technologies across three categories:
- The macro implications – for example, how a technology might impact economic drivers such as inflation, GDP growth, etc.
- The implications for investors who allocate capital, including asset managers and asset owners.
- The implications for financial services more broadly.
Not surprisingly, our focus at State Street Global Advisors has been on number 2, though the others also impact investors, albeit in less directly visible ways at present.
One big unknown remains regulation. Governments around the world have been slow to determine how and what to regulate on this sphere, unsurprising given how quickly these technologies have evolved. Regulation will have a first order impact on their adoption and the eventual gains we are likely to see.