Hard assets are a haven for investors

As investors shift away from AI and "asset-light" stocks, hard assets and companies with a physical foundation may be poised for success

Anyone who has seen the Dune movies but hasn't read the books might be perplexed as to why a clearly advanced space-faring future society doesn't seem to have any computers. The in-universe explanation is straightforward: although humans had created artificial intelligence, these machines and a small elite eventually took control of the rest of humanity. After a protracted, semi-religious uprising, all computers were eventually destroyed, and the development of "thinking machines" of any kind was outlawed.

When speculating about how AI will alter the world, it is getting harder to avoid thinking about this. After all, the possibility of massive job losses, the financial ramifications of widespread unemployment, and the general lack of purpose and autonomy seem like the perfect circumstances to spark widespread unrest if AI is to soon accomplish everything that its most enthusiastic proponents claim. The Luddites failed to halt the industrial revolution, so a real-world version of Dune's Butlerian Jihad would not be able to stop the use of AI, but there is a chance for social unrest.

However, it is doubtful that all of the money being invested in the field will be profitable if AI does not produce significant economic shifts. AI research will undoubtedly be extremely important in some fields, but this does not imply that it will change the nature of work in general. We might see a significant increase in middle-management positions overseeing and correcting AI tool output. This could lead to additional issues, such as how young workers acquire skills and expertise if AI handles the fundamental tasks they learn, suggesting that long-term end-to-end productivity gains may be surprisingly rare.

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Capital-light stocks give way to hard assets.

A comparison of the performance of capital-light and capital-intensive stocks.

I'm not sure how this will turn out or whether we can find a truly helpful middle ground just yet. Nonetheless, it is evident that investors are becoming more worried about the possibility that AI could jeopardize a lot of knowledge-based activities. As a result, they are shifting away from these stocks and toward companies with physical roots. You can see the reasoning: for instance, it is challenging to substitute a large language model for a railway.

Other trends corroborate this. The team at Ruffer Investment Company (LSE: RICA) notes that while AI disruption is undoubtedly drawing attention to real assets, it also coexists with a broader range of pressures, such as defense and security, energy requirements, and healthcare demand. Owning "constrained sources of supply" like commodity stocks becomes appealing in this setting as a hedge against inflation and other shocks.

In general, the consensus that has been in place for more than ten years is very different from a move to businesses with tangible assets. Asset-light stocks with low capital expenditures are now seen by investors as safer and more appealing. Although this is still just conjecture, it's possible that traditional heavy industries will be the favorites of the upcoming cycle due to a tense, unstable world that prioritizes security.