Commercial Awareness Update – W/C 10th June 2024

THE ESSENTIAL ROLE OF HUMAN EXPERTISE IN INTELLECTUAL PROPERTY VALUATION AMIDST AI ADVANCEMENTS

AI breakthroughs are substantially changing the landscape of intellectual property valuation. However, the argument over whether AI or human knowledge is better at appropriately valuing intellectual property remains ongoing.

The May 21 – 22 AI Safety Meeting, which the UK government co-hosted with Korea, indicates that the country is moving forward with regulating AI. The meeting aimed to examine the hazards associated with AI and possible solutions to mitigate them.

The issues

Despite their efforts, business executives are increasingly worried about staying current with swift regulatory changes. The problematic part is finding a balance between promoting innovation and regulating.

Lorraine Barnes, lead for generative AI at Deloitte UK, highlights that businesses are seriously threatened by the speed at which AI regulations are developing. However, depending only on AI to value intellectual property carries several serious concerns.

AI has the potential to produce inaccurate results by oversimplifying the complicated nature of IP assets. Such errors can have detrimental financial effects in a volatile, uncertain, complex, and ambiguous (VUCA) corporate environment. Undervaluation might result in lost opportunities, while overvaluation can lead to bad investment decisions.

Although Lord Chris Holmes, who introduced the AI Bill, is still hopeful that regulatory advancements will resolve AI-related issues, human oversight is still required due to the complex nature of intellectual property valuation.

The human experience

AI cannot match the crucial insights that human valuers bring regarding regulatory frameworks and industry trends. It takes specialised legal knowledge to distinguish between unregistered trade secrets and enforceable patents.

Furthermore, human specialists can provide detailed analyses of market dynamics, such as competitive environments, demand, and technology developments. Projecting the market potential and adaptability of intellectual property is necessary to evaluate its long-term commercial viability.

Human expertise can accurately assess hazards related to market volatility and technological bubbles more than AI alone.

Insight

While AI provides valuable tools for cost reduction and accessibility, human expertise is still essential for precise and nuanced appraisals, as highlighted by the argument over AI’s role in intellectual property value.

When human insight and AI efficiency are combined, a firm grasp of intellectual property value is ensured, which improves investment decisions and promotes innovation.

Despite such developments, the UK and South Korea emphasised regulating AI in the face of increasing unemployment and salary increases. In the UK, unemployment rose to 4.3% in March—the highest level in almost a year—while salaries increased by 2.4% in real terms.

There is more rivalry among job searchers due to the cooling employment market, which has seen a 26,000 decrease in open positions to 898,000.

Integration in the legal sector

Cost reduction and increasing efficiency

AI is revolutionising the legal industry by automating routine tasks, which cuts costs and time in half. AI technologies can now complete tasks more effectively than human labour, such as document evaluation, legal research, and due diligence.

In addition, sophisticated AI systems can predict case results, find applicable precedents, and develop contracts. As a result, legal practices become more compact, more profitable per client, and incur lower overhead expenses.

Effect of legal services acquisition by IP clients

With AI’s expanding capabilities, clients may rely less on traditional legal practitioners to handle regular intellectual property chores. AI systems provide quicker, less expensive methods for performing previous information searches, valuing intellectual property, and submitting patents.

Nonetheless, there is still a high demand for specific legal knowledge. Human engagement is still necessary for complex intellectual property challenges that demand strategic insights and nuanced understanding, particularly in high-stakes IP litigation, complex negotiations, and strategic IP management.

AI tool integration and adaptation

Legal professionals can keep their clientele by using AI tools to improve their services, increase accuracy, and speed up delivery. By integrating AI-generated data with professional expertise, solicitors may offer comprehensive evaluations and better guidance services. This hybrid method can significantly increase service value by having AI handle initial tasks and lawyers provide final analysis.

• By Asil Serhan

ELECTION WAVES: HOW VOTES SHAPE FINANCIAL MARKETS

Forecasters anticipated turbulent markets in 2024. With voters heading to the polls in 64 countries, the period leading up to January 2025 will provide numerous case studies on the relationships between elections and financial markets. While it’s evident that election polls and results influence markets, the relationship is not always straightforward.

For example, last week, Indian stocks fluctuated after Narendra Modi retained power by a slender margin. Conversely, South Africa’s rand and stocks have come under pressure due to the uncertain election outcome and a poor showing for the ruling ANC.

Meanwhile, Mexico’s ruling left-wing party appears to have comfortably won the presidential election, yet the peso has slightly depreciated, reaching a one-month low against the US dollar.

In this article, I examine why elections impact markets, explore historical examples of this phenomenon, and consider what might happen in the remainder of 2024.

If you don’t fancy reading it all, there are three commercial awareness takeaways at the end!

Why elections sway markets

Before delving into that relationship, let’s first define ‘markets’. Financial markets are where people buy and sell financial products like stocks, bonds, and commodities. Numerous factors influence these markets, including interest rates, supply and demand, government policies, and speculation.

However, the most critical factor for our discussion is geopolitics. The only certainty in geopolitics is its inherent uncertainty. Markets are notoriously averse to uncertainty, and elections contribute significantly to that.

Relationship between elections and markets

It is worth considering the genuine impact elections have on markets. To do this, we have to distinguish the short-term and long-term impacts.

• Short Term: Writing in the Economic Times, Naveen KR argues that market volatility rises before elections due to policy uncertainty but decreases after results clarify the political landscape. Election day sees muted activity as investors digest incoming data. Landslide victories briefly boost markets due to policy predictability, but gains are short-lived as focus returns to long-term fundamentals.
• Long Term: He suggests that whilst elections attract public attention, their long-term impact on equity markets is modest. Data shows a weak correlation between election results and major stock indices’ long-term performance, highlighting the slow translation of policy changes into economic impacts.

With this in mind, predicting ‘the impact of elections on markets’ is a misleading question. The only impact we can reliably observe is in the short term, which certainly doesn’t tell the full story.

The history lesson

According to Vijay Valecha, chief investment officer of Century Financial, historical data indicates that investors can expect lower returns and higher volatility during election years. “Since 1932, the US S&P 500 has averaged returns of 6.2 per cent in election years, compared to 9.6 per cent in non-election years. Additionally, market volatility tends to be higher during election periods,” he notes.

The story is different in the UK. Elections have typically influenced the market beyond just election day. In the sixteen elections since the FTSE’s inception in 1962, the market has averaged a double-digit percentage gain in the first year following an election where a new prime minister takes office.

However, as renowned US investor John Bogle wisely stated, “We deceive ourselves when we believe that past stock market return patterns provide the bounds by which we can predict the future.”

Anticipating the impact of Elections in 2024

The actual repercussions of elections in developing nations like India, South Africa, and Mexico are yet to unfold, promising continued volatility throughout the year.

Meanwhile, investors in the UK will be hoping for a repeat of historical patterns. With polls favouring Keir Starmer’s assumption of office on July 4th, there’s anticipation for a potential market uptick, akin to past instances of new prime ministerial terms.

Turning to the United States, all focus is on the potential Biden-Trump rematch in the Autumn. Notably, the S&P 500 surged 68% during Trump’s first term and has risen by 38% under Biden thus far.

Key commercial awareness takeaways

Navigating discussions around this topic, whether in interviews, assessment centres, or during vacation schemes, can be challenging. Here are three key takeaways:

1. Political Uncertainty and Market Volatility: Geopolitical landscapes are inherently uncertain, significantly impacting market stability.
2. Short-Term vs. Long-Term: It’s vital to differentiate between short-term market fluctuations, like those observed in India recently, and longer-term trends that eventually balance out.
3. Historical Patterns and Future Predictions: While historical data provides valuable insights, it’s essential to recognise the limitations of using past trends to predict future market behaviour.

• By Avishai Marcus

INVESTMENT TREATY PROTECTION

Investment treaty protection (ITP) has become a mainstay of international economic law, consequently shaping the landscape of cross-border investments. ITPs provide a legal framework to protect investors from economic and political risks in a host country, whether bilateral or multilateral.

In the wake of globalisation, the significance of investment treaty protection has escalated, influencing economic policies and legal expectations worldwide.

What is investment treaty protection?

It is a complex chain of safeguards afforded to foreign investors under international agreements, such as the Energy Charter Treaty and The EU-UK Trade and Cooperation Agreement.

They protect and promote investments through mechanisms which include:

• The principle of Fair and Equitable Treatment: FET ensures that the host country manages foreign investors consistently and transparently, clarifying that engaging in arbitrary and discriminatory conduct against foreign investors is strictly prohibited.
• Protection against expropriation: Expropriation involves the host state confiscating private property for public use. Treaty protection ensures that due process is adhered to and that compensation is adequate when expropriation occurs.
• Full protection and security: Host states must provide a safe and secure investment environment, protecting investors from physical harm and legal uncertainties.
• Free transfer of funds: Investors must be able to transfer funds related to their investment activities without restrictions, thereby ensuring liquidity and financial stability.
• Dispute resolution mechanisms: ITPs usually include safeguard provisions for investor-state dispute settlements (ISDS), allowing investors to bring claims against host states in international arbitration forums.

Current developments in ITP

Reforming ISDS mechanisms

There is a growing movement towards reforming ISDS mechanisms to address bias, lack of transparency, and inconsistency in arbitral decisions.

UNCITRAL is leading efforts to develop a multilateral investment court as a potential alternative.

Environmental and social considerations

Recent treaties increasingly incorporate clauses that balance investment protection with environmental and social responsibilities. For example, the EU has been at the forefront of integrating sustainable development goals into its investment agreements.

Regional trade agreements

Extensive trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the African Continental Free Trade Area (AfCFTA), include investment chapters that set new standards for investment protection.

Brexit and the UK’s investment policy

Brexit has necessitated the renegotiation of numerous treaties. The UK now independently negotiate trade and investment agreements, consequently reorganising its approach to investment protection.

Impact on society

Economic growth

ITPs encourage foreign direct investments (FDIs), fostering economic growth and development by providing a stable and predictable economic environment. Increased investment can lead to job creation, infrastructure development and technological advancement.

Legal and regulatory reforms

The need to comply with international standards prompts home countries to undertake legal and regulatory reforms, promoting better governance and enforcing the rule of law.

Balancing interests

While investment treaties protect investors, they also pose challenges for host states. Governments must balance attracting FDIs with maintaining regulatory autonomy to address public policy concerns such as health, the environment and labour rights.

Access to justice

ISDS mechanisms provide a platform for investors to seek redress against host states, ensuring that disputes are resolved impartially. However, arbitration’s high costs and complexity can sometimes limit access for smaller investors.

Impact on the UK’s legal sector

ITPs significantly affect operations in the legal sector in many ways, with some of the impacts as follows:

• London is a global arbitration hub, and the prominence of investment treaty disputes has reinforced the city’s status. The presence of leading arbitration institutions like the London Court of International Arbitration and a concentration of legal expertise in investment law attract cases from around the world.
• Also, investment treaty arbitration generates substantial demand for legal services. UK law firms and barristers specialising in international investment law and arbitration frequently engage in high-stakes disputes, contributing to the sector’s growth and global influence.
• Post-Brexit trade and investment treaties mean legal professionals will continue to play a crucial role in drafting, negotiating, and interpreting new agreements, thereby influencing international norms and practices. They must also navigate new regulatory environments and advise new and existing clients on compliance and strategic adjustments.

In conclusion, investment treaty protection remains vital to international economic relations, providing essential safeguards for investors whilst influencing legal and regulatory frameworks worldwide. The evolving landscape, characterised by reforms and new treaty developments, reflects the ongoing efforts to balance investor protection with broader societal and environmental goals.

The implications are particularly significant for the UK, as such treaties help to reinforce its position as a leader in international arbitration and the provision of legal services, and as global dynamics shift, investment treaty protection will undoubtedly play a crucial role in shaping the future of investments and any ad-hoc legal services.

• By Aqua Koroma