The Viewpoint: Competing forces – AI versus Iran

If at the start of hostilities between Iran and the US, someone predicted that two months later we would be in the biggest energy crisis for a generation and that major stock markets would be at all-time highs, this would have seemed highly unlikely.

All economic activity is energy transformed, and higher energy prices have historically caused rising inflation and falling economic growth. This was most recently seen in 2022 when the war between Russia and the Ukraine began. With no obvious end to the war between Iran and the US (accepting this can change in a social media post) why are markets seemingly complacent about this energy crisis?

Buy the dip?

One explanation is that investors have derisked their portfolios by selling equities multiple times in recent years and have soon regretted it. Covid, the Russia/Ukraine war, and last year’s ‘Liberation Day’ trade war were initially met with sizeable equity market falls, but all turned out to be buying, not selling, opportunities as new all-time highs soon followed. Maybe investors have finally become trained to ‘buy the dip’ and take advantage of lower prices?

Like the financial system, energy is pervasive, so is one of the things where a crisis could be so material as to change the outlook for the global economy and investors.

Thinking every dip is a buying opportunity would however be a mistake. As someone who has managed money through the financial crisis, a once-in-a-generation event can come along so big that it does make sense to concentrate on the return of your capital rather than the return on your capital. Like the financial system, energy is pervasive, so is one of the things where a crisis could be so material as to change the outlook for the global economy and investors. If this were the only variable investors had to comprehend then derisking could make sense. However, it is not.

Alongside a generational oil crisis, we are living through a generational technology evolution – namely artificial intelligence (AI). While on February 27 we would not have known about the impending Iran war, we would also not have been aware of the explosion in demand for AI, particularly from businesses. This has created a historic shortage in computing capacity which is resulting in rising profits for those who have it, and for those who can build it. What is the combined effect of Iran and AI in the last eight weeks? Expectations for company profits at the overall market level have gone up.

Equity markets are simple things. Where earnings go, they will follow. Currently it appears that investors are more optimistic about AI than they are pessimistic about Iran. This is the second time AI has saved the market. The first was with the release of ChatGPT, the first AI tool for the masses, in late 2022 when equity markets were under pressure due to the Ukraine war. It would seem AI has saved investors again.

Of course, this doesn’t mean what markets are concluding is a foregone conclusion. The benefits of AI can be seen in markets today, but the headwinds of supply chain disruptions and higher inflation from the closure of the Strait of Hormuz will take longer to impact the global economy.

AI is positive for economic growth

There is however some logic in the optimism of markets. I remember when the internet was in its early days and we also had a war in the Middle East and oil crisis. This was of course after the terrorist attacks of September 11 in 2001. The internet had a lasting, multi-decade positive impact on the economy, whereas the subsequent invasion of Afghanistan did not have a commensurate negative impact. The good outweighed the bad due to its longevity. Effectively the message from markets is the same today. AI will remain a positive for economic growth and productivity long after the Iran/US war has ended, whenever that may be.

What is less talked about is the positive influence AI is having on economic prospects. This is another example of where to be a successful journalist you need to be a pessimist, whereas to be a successful investor you need to be an optimist.

This shouldn’t be mistaken for complacency. History is certain but the future is probabilities. There remains a probability that the war will begin again and that economic growth will see a downturn. That scenario is well written and spoke about in the media. What is less talked about is the positive influence AI is having on economic prospects. This is another example of where to be a successful journalist you need to be a pessimist, whereas to be a successful investor you need to be an optimist.

While I don’t have much to add on the resolution of the Iran war, other than to note perhaps the fundamental change in warfare with cheap drones defeating expensive aircraft carriers, there are some AI observations which are worth making.

The big change in the market optimism around AI has come from the pace of adoption by businesses. This can be seen most clearly with the rapid growth of Anthropic, which itself focuses on the enterprise sector. Annualised revenue for Anthropic at the start of the year was disclosed as $9bn. By April this had surpassed $30bn. This rate of growth is staggering and illustrative of the benefit companies see of integrating AI into their businesses. This is giving the whole of the AI supply chain, from cloud companies like Amazon to semiconductor makers such as TSMC, the confidence to invest in their businesses. The rate of growth of this ecosystem is proving material to the health of the global economy.

While there remain concerns over the impact on workers of this rapid rollout, there are also initial signs that the positive impacts may be much larger. Humans are infinitely creative; the bottleneck so far has been the mechanism to make those ideas reality. An inability to code, design, or at a more basic level use spreadsheets has historically left a feeling of frustration. Increasingly AI can take an idea from the point of creation to usability, resulting in an explosion of activity.

Areas that have been the quickest to adopt AI, such as radiography and coding, are seeing increasing levels of employment – much to the surprise of many. New business creation is becoming much easier for entrepreneurs, a trend that started with cloud computing. There seems a good chance that, like technological revolutions such as personal computing and the internet, AI will be additive to society so long as education systems and businesses support reskilling and training.

Putting all the above together, I think that equity markets are currently choosing to look through a severe but possibly time-limited energy shock and instead focus on the durability of an AI-driven uplift to productivity and profits. That optimism can still be derailed by renewed escalation of hostilities in Iran, or a passing of higher oil prices into inflation and weaker demand. The next few months for markets will be determined by both geopolitical developments and whether enterprise AI adoption continues to translate into sustained earnings upgrades. For investors, the key is to stay alert to the risks without losing sight of the possibility that AI, like past technology waves, proves the more enduring force.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied.