News and Insights

Overcoming techno fear in fixed income markets

Investors should guard against irrational fear of developing technologies such as artificial intelligence and consider their potential relevance to a changing fixed income market landscape, according to Insight Investment1 fixed income product specialist April LaRusse.

Commenting on the influence of AI across business sectors and the new investment opportunities it could create, LaRusse said that new technologies should be embraced and not feared.

“Some aspects of AI have already prompted fears technological change could create problems we can’t even as yet imagine. While this is possible there are also reasons to be optimistic. Throughout history many people have feared advances in technology – from the printing press to email and the worldwide web. In most cases these fears have been largely groundless,” she explained.

LaRusse acknowledged some genuine fears exist that robots, algorithms and other systems could replace people and lead to job losses, but said their increased use could actually boost employment in more highly skilled areas.

“Looking ahead there is likely to be some replacement of jobs and any jobs that are mechanical or repetitive can, in theory, be replaced. But technology can create jobs and we don’t have to look at it simply as a job destroyer.”

According to LaRusse, companies tend to use AI to either grow or cut costs. “Large companies often want to use AI for growth purposes, but it is not always appropriate. Many companies are at a stage where they are wondering whether to use AI to reinvent themselves or are simply adapting it for their processes,” she added.

Describing the business sectors that currently make the most use of AI, LaRusse pointed to the technology sector, automotive assembly and financial services but also highlighted growing potential in education and healthcare.

Medical advances

Commenting on specific developments in healthcare, she said: “In terms of the medical sector and its use of new technologies radiology is a promising area. The shocking thing is that the third largest killer in the US is medical errors. A lot of these errors focus on the unexpected conflict of prescribed drugs in individual patients. In terms of data analysis, AI and improved diagnostics could help improve the accuracy of medical records and prescription and ultimately help save lives.”

In the transport sector LaRusse also sees strong potential for AI in ridesharing – as technologies improve and concerns over fuel emissions rise. Commenting on developments in the retail sector, LaRusse said markets may see the rise of ‘smart pricing’ – tailoring pricing to individual customer factors as retailers adapt their use and analysis of captured customer data.

“Smart pricing can create a price for customers that is correct for the time of day, time of year, what the weather is like and the device goods are bought on. In some cases this can be used to vary prices to offer discounts. Offering a slightly better price to customers can build loyalty and some retailers are becoming very smart about using this data,” she added.

LaRusse believes all these developments are highly relevant to investors, giving pointers to the future direction of both companies and markets.

“AI is very relevant to the bond markets. Fixed income investors are constantly trying to determine who will be the winners and losers and which companies are likely to fail when others use technology that completely changes the competitive landscape they operate in. In some cases entire sectors can be disrupted or revolutionised by new technologies,” she said.

Commenting on wider trends and developments within the fixed income landscape, LaRusse pointed to some recent positives. “In credit markets the good news is that companies are generally in good shape in terms of leverage and we are not seeing leverage levels of major concern to us, though corporate bonds have faced a tough year.

“There is a lot of idiosyncratic credit around so for an active investor the challenge is to pick the winners, avoid the losers and be very aware of what they are buying. In this respect, liquidity, contingent liabilities, regulatory issues and ESG continue to exert significant influence,” she said.

Source: Bloomberg, Insight calculations. LTM = Last twelve months to 30 September 2018. Earnings are before depreciation, interest costs, taxation and amortisation (EBITDA).

Despite this, LaRusse believes fixed income markets could be reaching an inflexion point. Commenting, she said: “We may be at a turning point in the market, with growth past its best, so there is little scope for complacency. Interest rates are going up in some markets so it is important to seek assets which will be resilient in that market.

“That said, there is some room for corporate growth, inflation is under control and – for the most part – default risk isn’t an issue. In terms of European credit, yields are still low but we believe there are opportunities to find value and valuations are also much improved,” She concluded.

The value of investments can fall. Investors may not get back the amount invested.

  1. 1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.

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