Stuart Kirk, stuart kirkHead of Deutsche Asset Management’s, Global Research Institute

 

 

 

 

As prices soar it is common for investors to dream up ways to justify valuations.

That said, here are two out-of-the-box arguments why rapid advances in artificial intelligence could raise returns in perpetuity.

The point is not to suggest current valuations are justified; rather now seems like a sensible moment to ask whether some new technologies are so different from previous advancements they could upend the laws of economics and accounting.

First consider how artificial intelligence can alter the concept of depreciation. Everyone understands that assets such as buildings, machines, and mainframe computers deteriorate over time. Ageing appears as depreciation in company financial statements and in 2017 was equivalent to about a third of operating cash flows globally.

But what happens to a computer with artificial intelligence that actually becomes smarter?

Machine learning by definition is the opposite of decay. If an asset grows more valuable with use then it should be negatively depreciated.

‘Machine learning by definition is the opposite of decay’

For certain technology firms the earnings kick would be substantial. At Google, say, depreciation in the past year was $6bn; if only a tenth of that was reversed the company’s market capitalisation could rise by about one fifth.

Nor must depreciation reverse to improve returns. Simply lowering the rate at which assets tire out is enough.

Artificial intelligence combined with the internet of things will result in assets becoming more adaptive and responsive – thereby extending their useful lives. And slowing the ageing process comes at a crucial moment.

For US non-financial companies, for example, the ratio of accumulated depreciation to the gross value of plant and equipment has risen by a quarter over the past 25 years. A second argument involves the other main factor of production: labour.

The reality is that what it means to be human – and therefore a worker – will change over the coming decades. Breakthrough technologies such as brain-computer interfaces, robotic exoskeletons, and virtual assistants have the potential to dramatically increase productivity.

This is desirable in and of itself, but also remember how employee costs are accounted for.

Remuneration is expensed as a profit and loss item. Human beings are therefore treated differently to other assets, which sit on balance sheet and are depreciated. Should this remain the case if half of a construction worker’s marginal productivity of labour is derived from an exoskeleton? Or how about a call centre operator plugged into a future version of Salesforce via a brain-computer interface? At some level of bionics or digital enhancement the world’s accounting bodies may decide that workers can be depreciable assets too. The result would be a near-term jump in profitability.

However if human productivity improves as cyborg worker-machines learn on the job then the negative depreciation story above also applies here. Again the potential uplift to margins is huge as the labour share of output in the US, for example, is about 60 per cent. To be sure this is some out-there stuff. But so is the idea of intelligent machines that (who?) learn and improve with age.

 

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