AI and Investments

AI defined
Artificial Intelligence (AI) has been at the forefront of technological progress in 2024. There have been remarkable advancements, from creating personalised treatment plans within healthcare, to autonomous vehicles using AI for driving. But how is AI being utilised within the investment industry? When looking at AI impact on the economy, there are at least two important areas we consider. First, how can AI, especially machine learning and big data technologies, improve our analysis? Second is the impact of AI innovations, tools, and services on economies, industries, and companies and the associated risks.
 
AI in the investment industry
AI could change the investment industry through things like enhanced stock picking, portfolio management, and customer experience (i.e. through personalised advice). It could make investment processes more efficient, accurate, and customer-centric. Within portfolios, some argue active managers (who try and beat the market) could have an edge by identifying overlooked details that AI might miss. For example, thematic investing, which focuses on long-term trends, may seem straightforward but is incredibly challenging (although everyone’s a genius at it with hindsight!). To be successful at it, managers must identify undervalued themes, profit from them as they are repriced, and exit at the right time—tasks that require nuanced judgment which AI may struggle to replicate. This raises the question of whether AI can fully replace human expertise in active management.
 
Risks
Growing capabilities of Artificial Intelligence (AI) tools present opportunities as well as risks. Such external risks, expected to increase in frequency and sophistication, include the use of AI tools to spread misinformation and perform automated cyber-attacks. This is where rigorous risk management frameworks are key in protecting businesses and therefore investors’ portfolios. AI presents emerging risks and issues which all businesses within the investment industry will have to tackle as AI further embeds itself into day to day processes.
 
Forward looking perspectives
AI is reshaping decision-making by improving data efficiency. Future AI advancements may focus on precision and quality, potentially reducing human involvement as data grows too vast to manage manually. Our view is that AI may auto-source and evaluate data, but the investment process should retain a "Human-in-the-Loop" approach, see diagram below. This ensures human oversight to mitigate biases, validate models, and guide AI in tasks requiring judgment or complex decisions. Precision is best achieved through collaborative feedback between human intelligence and artificial intelligence.

The Noise

• US stocks rose over 20% in 2024, marking two consecutive years of strong returns, despite some year-end market jitters after the Federal Reserve announced it plans fewer interest rate cuts in 2025 than previously expected. While other global markets also grew, their gains were smaller—for example, the UK market increased 5.7%, and Asia-Pacific stocks were up 7.6%. A big reason for the US market's success was the strong performance of major tech companies, often called the "Magnificent Seven," which include giants like Apple and Google. These companies dominate the US market and have been a primary driver of growth over the last year, highlighting the outsized influence of tech on the US economy. As Trump starts his second term, the big question for 2025 is whether US stocks can keep up this winning streak.

• UK house prices surged by 4.7% year-on-year in December 2024, surpassing economists’ forecast of a 3.8% annual increase. On a monthly basis, house prices rose by 0.7%, bringing the average property value to £269,426—just shy of the record high set in 2022. The accelerated growth in house prices has been attributed to several factors. Notably, the impending increase in stamp duty, which is effective in April 2025, appears to have incentivised buyers to expedite transactions. Additionally, the release of pent-up demand following the Budget announcement provided further momentum to the market.

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• Japan’s stock market, had its best-ever performance in 2024, ending the year up more than 21%. This surpassed its previous record high set 35 years ago on December 29, 1989, what made this rally even more surprising was that it wasn’t driven by foreign investors who typically play a big role in shaping Japanese stock prices. Instead, factors like news of a potential merger between Nissan and Honda, along with positive end-of-year sentiment, helped lift the market in the final days of trading.

The Numbers

The Nuance

As we enter the new year, the UK marks a historic milestone: its first year without coal-powered energy, making it the first major G7 economy to achieve this feat. This accomplishment highlights the ongoing energy transition from fossil fuels to cleaner alternatives.

The UK's approach emphasises the importance of a gradual transition. In 2015, coal still accounted for 9% of the nation's electricity supply. An immediate ban on coal power generation at that time would have caused significant economic disruption and jeopardised energy security. The phased approach allowed for a smoother adjustment balancing environmental goals with practical considerations.

This milestone also shows that climate targets are achievable. In 2015, the UK government set an ambitious goal of phasing out coal by 2025, promising that “coal-fired electricity generation will end by 2025.” Remarkably, this target was not only met but achieved ahead of schedule in September 2024 with the closure of the Ratcliffe-on-Soar Power Station in the Midlands.

However, the UK continues to rely on fossil fuels, with natural gas currently contributing 28% to power generation for the nation's energy supply, according to the National Grid (data as of 03/01/2025). This dependency underscores the need for continued investment in renewable energy infrastructure and innovation to meet climate targets and stay ‘Paris aligned’ with a 1.5-degree warming target.

In a global context where climate targets are often missed and warming temperatures surpass critical thresholds, the UK's coal phase-out is a positive step worth celebrating. It provides a hopeful narrative for the year ahead, serving as a reminder that meaningful progress on climate action is possible with the right strategies and commitments.
 

The Niche

A fun financial markets fact of the week

Did you know that stock markets have existed for an impressive 423 years? The Amsterdam Stock Exchange, established in 1602, is widely regarded as the world’s oldest official modern stock exchange. Created in response to the ‘Nederlandse Oost-Indische’ which issued shares to raise capital for its vast trading operations. Though now it has merged with the Brussels and Paris stock markets to form the ‘Euronext’ exchange. This historical evolution reflects how markets have continually adapted and expanded over the centuries, shaping the global financial landscape we know today.

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.