Why automation is a compelling investment theme

February 19, 2020 15:01
Labor’s share of national income has been declining in developed economies since the 1980s. Photo: Reuters

Investors are always looking for outperforming sectors but such industries are just a handful rather than many, as winners are typically the minority.

In the era of fourth industrial revolution, automation is likely one of those rare outperformers.

Let's take a look at some data. The labor share of income in the United States has fallen, declining from an average of 62 percent in the 1980s and 1990s to roughly 55 percent in the 2010s thanks to automation.

A simulation presented in the Federal Reserve Bank of San Francisco Economic Letter shows that without automation, the labor share could have been higher at 57-58 percent.

Do not dismiss the 2-3 percent difference, given that policymakers are chasing unemployment rate even at the 0.2-0.3 percent order, as labor input is one of the key factors of production that counts straight into GDP.

With a labor share standing over 50 percent, there is still lot of room for reduction, to free up workers for other activities.

The impact of automation has been obvious since the financial tsunami more than a decade ago.

In fact the drivers of Nasdaq's strong gains, including FAANG are all of this kind. Automation does not “belong” to AI firms. Often it is those who apply automation to the market or to their clients, making the most money.

It follows that firms which might adopt these technologies would have much upside potential. What exactly are these then?

Well, firms having large labor share would have the most potential as they have lot more scope for automation.

Which firms have high staff-to-profits ratios? One should be able to find those numbers from their financial reports.

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The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (facebook.com/kachung.law.988, [email protected])