Industry News

AI Technology: Generative Hype or Reality?

KLOFinancial |

Since the release at the end of November 2022 of ChatGPT, an Artificial Intelligent (AI) chatbot developed by the company OpenAI, many pundits and “futurologists” have predicted humankind is on the cusp of a revolutionary change.

A change expected to be so disruptive and dramatic to have prompted a public appeal in the form of an open letter, signed by notorious high-profile figures, to pause any further development and experiments in the AI field for at least 6 months.

Whether the apocalyptic tone of the latter was really justified in saying that “AI systems with human-competitive intelligence can pose profound risks to society and humanity”, is still open to debate.

From a more mundane viewpoint, in a groundbreaking research report, the consultancy McKinsey & Company states that “Generative AI’s impact on productivity could add trillions of dollars in value to the global economy”, with the estimate ranging between $2.6 trillion to $4.4 trillion annually. To put the scale of AI expected economic impact into perspective, the size of the UK entire economy as measured by its Gross Domestic Product (GDP) was about $2.8 trillion in 2022 at today’s market value.

According to the study, generative AI will have a massive impact on all areas of business functions and industries from customers operation, sales & marketing, to all sectors of engineering, banking, life sciences, education, health & pharmaceuticals and many more fields besides.

On the face of it, generative AI seems to promise a veritable quantum leap in productivity terms, as well as being incredibly disruptive of the way businesses have been run so far and of the economy at large.

Investors seem to have granted the AI narrative credibility, as evidenced by the performance of the S&P 500 Information Technology and Software sectors, which have been running wildly into bullish territory so far, with the former returning over 41% and the latter almost 34% in US$ terms year to date.

An informative graph showing the information technology growth since January 2023

How much of these outsized returns are justified purely by the economic potential of generative AI is impossible to tell.

This kind of market action tends to get started based on some sound economic rationale, however, once the prevailing ‘story’ takes hold, momentum chasing and band-wagon effects such as Fear of Missing Out (FOMO), draw in more and more investors, pushing the market even higher.

Whether this market run can be sustained for the foreseeable future is anybody’s guess, the risk is investors will extrapolate the latest returns and current conditions too much further into the future and will end up being whiplashed by a severe market correction.

Financial history suggests no market trend can last indefinitely, albeit for how long the trend will be sustained is unpredictable. This is why diversification among sectors, equity investment styles, geographies, and asset classes, is likely to remain key for investors over the medium to long term investment horizon.

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Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested. Past performance cannot be relied upon as a guide to future performance. KLO Financial Services Ltd are registered in the UK, company number 08711328. We are authorised and regulated by the Financial Conduct Authority, reference 710272. For any information please visit our website