Industrial revolution 4.0: ghosts of disruption past, present and future

The fourth industrial revolution is well under way. Its effects should be factored into asset allocation here and now, and tracked and reassessed regularly.

Oct 19, 2018 | Arnab Das

The fourth industrial revolution – widely known as IR 4.0 – has the potential to transform economic and financial activity at global, national, firm and household levels. This paper explains some of the key transitional challenges that are already unfolding amid greater use of “capital” – via digitization, automation and artificial intelligence – across areas of human endeavor that have hitherto been the province of “labor”.

Looking beyond the rudimentary attractions of identifying “the next big thing”, we explore the possible implications in terms of major public policy. These include fear of mass unemployment, more income inequality and threats to the historical catch-up growth model for emerging markets. 

As with any episode of innovation-led disruption, there are likely to be winners and losers. We argue that change has become an accelerant rather than a constant and that this must be reflected in asset allocation decisions.

We suggest that radical change is all but inevitable and that disruptive innovation could play a key role in addressing the challenges that IR 4.0 poses – just as it is now playing a role in creating them. We argue that the longer-term impact of the fourth industrial revolution may ultimately depend on ensuring that the losers do not massively outnumber the winners. 

More specifically, the paper predicts that the effects of IR 4.0 will include continued moderate or low inflation pressures, pointing to subdued nominal bond yields; significantly greater national differentiation, reflected in the shares of activity and in stock market capitalization and earnings streams; and much more disruption in the structure and relative market capitalization ratios across sectors and national indexes.
 

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