Investors take refuge in hard assets

Anybody who has watched the Dune films without having read the books may be confused by why an obviously high-tech space-faring future civilisation appears to have no computers. The in-universe explanation is simple: humanity had developed forms of artificial intelligence, but these machines and a small elite came to control the rest of humanity. All computers were eventually destroyed in a long, semi-religious revolt and the creation of all forms of “thinking machines” was banned from then on.

It is becoming hard not to imagine this when speculating about how AI will change the world. After all, if AI will soon do everything that its most excited proponents claim, the potential for huge job losses, the economic consequences of mass unemployment, and the broader lack of purpose and autonomy sound like exactly the kind of conditions to create mass unrest. That doesn't mean that a real-world equivalent of Dune's Butlerian Jihad would be successful in suppressing the use of AI – the Luddites did not manage to stop the industrial revolution – but the potential for social strife is there.

Yet if AI does not result in huge economic changes, it is questionable whether all the capital being pumped into the sector will pay off. There seems little doubt that AI research will be hugely significant in some areas, but that doesn't mean it will transform work more widely. We may end up with a lot more middle-management jobs supervising and fixing the output of AI tools. This could create its own problems – how do young workers gain skills and expertise if the basic work on which they learn is done by AI? – implying that long-term end-to-end productivity gains could be surprisingly scarce.

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Hard assets take over from ‘capital-light’ stocks

At the moment, I have no firm view on which way this goes or whether we find a genuinely useful middle course. However, it is clear that investors are increasingly concerned that many knowledge-based activities are potentially at risk from AI. Hence they are rotating away from these stocks towards those with businesses that are rooted in the physical world. You can understand the logic: it is difficult, for example, to replace a railway with a large language model.

There are other trends supporting this. AI disruption is clearly driving attention in real assets, but it also sits alongside a wider set of pressures that includes defence and security, energy needs and healthcare demand, as the team at Ruffer Investment Company (LSE: RICA) points out. This is an environment in which it becomes attractive to own “constrained sources of supply” such as commodity equities, as a hedge against inflation and other shocks.

More broadly, a shift to firms with hard assets is very different to the consensus that has prevailed for well over a decade. Investors have come to see asset-light stocks with low capital expenditure as safer and more desirable. This remains purely speculation at this stage, but maybe a tense, volatile world with a focus on security means that old-fashioned heavy industries will be the darlings of the next cycle.

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