Year of the Rat reflections: The spread of AI, and inflation risks
AsianInvestor looks back on our market predictions at the beginning of Year of the Rat, assessing our views on the spread of AI among asset owners and the danger of inflation.
At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors allocate their funds. And then, one year later, we revisit these forecasts to see how well we did.
Our seventh and eighth Year of the Rat predictions looked at whether artificial intelligence tools were likely to hit the mainstream among asset owners in Asia Pacific, and considered whether inflation was set to become a cause for concern.
Will AI gain traction as an investment tool among asset owners in Asia?
Answer: No
Verdict: Correct
Several terms have begun to influence the strategic plans among asset owners and fund managers alike. One of the uppermost is artificial intelligence.
The concept of utilising big data and complex algorithms that can search through it and, ideally, find patterns that can assist better investing is not new, but advances in technology mean that it has become part of the conversation around new investment tools. Modern fund managers like to boast about their tech capabilities, and often mention that AI helps support their decision making.
Did it greatly spread during 2020, to become a fairly common tool among asset owners in Asia Pacific? No.
It's still in the early stages, and while some advanced asset owners are experimenting with ways to utilise AI solutions – think Ping An Insurance, Singapore's Temasek or Future Fund of Australia – most still prefer to hire external asset managers to do the heavy tech lifting on their behalf, as we noted in March 2020.
That is likely to change, but it will probably take several more years for AI to become a common tool among institutional investors. Many leading Asian asset owners are public sector-linked, and they would need to justify expensive outlays on AI tools to sceptical government ministries. Until there is consistent evidence that these complex products can ensure better returns, they are unlikely to get the approval to invest into them.
That said, the region's tech visionaries are likely to slowly be joined by others. Sovereign wealth funds in particular tend to be forward-looking and less accountable to how they spend money to support their investment approaches, at least in the short-term. Greater numbers of them will likely embrace AI as evidence emerges of the positive benefits it can offer to investing.
Meanwhile Japan's Government Pension Investment Fund (GPIF), hardly a cutting edge investor in most respects, has been experimenting with AI analysis of the fund managers it uses and how closely they hew to their stated mandates. The asset owner wants to do so in order to better understand its own risks and improve its overall performance with the external managers it is required to use.
If GPIF and other leading asset owners can report success in such efforts, that will likely convince others to follow suit.
Is inflation likely to prove a downside risk?
Answer: No
Verdict: Correct
In early 2020 fears of slowing western economies were coinciding with ongoing low interest rates to leave worries about the longer term health of financial markets. But there were also some economists who wondered whether inflation was an under-discussed risk for the world.
It wasn't apparent exactly what could trigger a spike in prices, but US president Donald Trump's ongoing trade war with China, along with ancillary disputes with other nations, was seen as one potential trigger. Tariffs are, essentially, trade taxes that get passed on to customers, after all. If tensions grew into outright hostilities it was possible that this could trigger a general rise in prices, even amid relatively tepid economic growth.
And indeed, in January the US's consumer price index (CPI) registered 2.5% monthly growth, which was relatively rapid by modern standards.
Despite this sign early in the year, we felt that a sustained spike in prices was still a relatively remote possibility. And indeed, this proved to be the case, particularly given the rapid onset of the Covid-19 pandemic throughout February and into March. Inflation concerns took an absolute backseat, as governments and central banks threw money at the problem of suddenly paralysed economies, and financial market panic.
Inflation remain subdued during 2020. The US's consumer price index inflation was just 1.4% in December
Instead of worrying about there being too much risk of price rises, central banks around the world cutting benchmark interest rates to minimal levels and flooding monetary systems with more liqudity in an effort to prevent a run on the banks and assets.
Meanwhile, governments have opened the purse strings as wide as possible to stimulate struggling economies and to prevent surging unemployment. Amid this, inflation remain subdued. The US's CPI was just 1.4% in December 2020, for example.
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US CPI inflation by month, 2020
Of course, the unprecedented level of these efforts could prove a drag on economic growth in the years to come. The debt needs to be repaid, after all. And, in the past, inflation has been a useful tool to help ameliorate the total cost of large public debt burdens.
So, while inflation is far from the centre of market attention today, it is possible that the Federal Reserve might tolerate or even encourage a measure of price rises in the coming years.
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