During the first quarter of 2023 the fund outperformed the MSCI Emerging Markets index by 3.3%. Most major markets including Taiwan, China and Mexico contributed positively to relative performance, as did the fund’s avoidance of India. The notable exception was Brazil where a series of missteps by the Lula government kept interest rates high and further pressured equity valuations. While we have been moderating our exposure to Brazil, we still believe valuations are in distressed territory and cost of capital is more likely to decline from current levels.
Within Latin America, Mexico has been the stand-out performer in recent months. A key factor in this has been the theme of near-shoring, accelerated by Covid and political factors. This is not a new phenomenon however.
At North of South we spend a lot of time discussing the implications of widespread availability of text based “AI” models such as Chat GPT. They are delightfully good at crafting well written text on any subject. There is no question that for any white-collar job involved in outputting any form of text (journalism, advertising, software, technical documentation, customer relations, business development, creative writing, ahem… quarterly report writing…) it will be an incredibly powerful tool although it still has limitations.
A quarterly update cannot possibly be sufficient to work through all the implications of this revolution, but we can highlight some key thoughts. The parallels to historic industrial revolutions are clear. Farm productivity led to fewer peasants and more factory workers. Automation in factories increased output and reduced need for labour, leading to more service workers. The internet has put retail employees out of jobs but made them delivery drivers. Each time long-term mass unemployment was predicted and did not happen as workers transitioned into new types of jobs – increased productivity ultimately led to faster economic growth and demand.
Indisputably, fewer man-hours will be needed to generate content going forward. The ability to write software and automate tasks will be increasingly democratized. In some areas decision making by AI may become or already is superior to human judgement. This should be disinflationary as fewer highly paid specialists will be needed in many fields to produce the same output. A key difference to prior industrial revolutions is that it displaces middle class jobs rather than the unskilled. This could be a positive by boosting productivity of the highly educated but also reduce the group’s earnings and spending power. A smaller group of coders is needed when using AI to work through tasks. Will a redundant software engineer find it easier or harder to reinvent himself than a 19th century peasant? On the other hand, poor literacy skills may become less of an impediment to career advancement and improve social mobility. As always there will be winners and losers.
Removing bottlenecks in skilled specialist availability seems like a good thing for the global economy, especially where inflation is a concern. An obvious direct impact should be increased capital investment in IT hardware to accommodate the various AI models. Optimistically, higher productivity could lead to more leisure time and spending on travel, entertainment and education. Pessimistically, companies will cut costs but simultaneously reduce employment and wages and therefore consumer end-demand.
In Emerging Markets the impacts will vary depending on their stage of economic development but the phenomenon should have broadly similar impacts globally. Given the hardware angle, Taiwan and Korea seem well placed. IT and outsourced service sectors in India and the Phillipines may be more at risk. It is clear that we need to continue to discuss and monitor the risks and opportunities while bearing in mind the maxim that markets always overestimate the near term impacts but underestimate the long term impacts of new technologies.
