Hamish Douglass says AI could wipe out half the index

Herald Sun

3 days ago

Magellan co-founder Hamish Douglass said the AI revolution will be remembered for the ripple effects that lie further ahead, one of them potentially being a Wall Street wrecking ball that puts even the most analogue businesses at risk.
Artificial intelligence will recast the sharemarket, just not in the way most people think.
Mr Douglass is a private investor since leaving Magellan in 2022, 16 years after he founded the global fund manager with Chris Mackay. He championed stocks like Microsoft and Alphabet in his era at the top of the global equities manager.
Today, he is decidedly more bearish and challenged the optimism promoted by AI evangelists, like the propensity to minimise its effect on employment.
'Now is the most exciting and the most frightening time to be an investor in my lifetime,' Mr Douglass told The Australian.
'You may have half the index virtually collapse by 50, 60 or 70 per cent in share price in the next five to 10 years because businesses are so disrupted.'
The devastating consequences he foresees include mass joblessness and an unprecedented slump in demand.
'AI is going to be hugely disruptive, but it's not going to become apparent for about five years. Working out ahead of the rest of the market which companies will be the winners and the losers is more important today than it's ever been.'
Alongside the dramatic shift brought about by AI, he is surveying rising tensions in the geopolitical landscape, too. Amid the headlines documenting the Iran-Israel war, he is alert to the risk that China invades Taiwan.
'Two of the greatest companies in the world at the moment, Nvidia and TSMC, are hugely exposed to the Taiwanese question. As a fund manager, how do you calibrate and risk weight and position yourself around the possibility of that happening? We're not talking 50 years out. This is probably within a five-year time frame. That risk is a very real risk,' he said.
Passive funds would be hugely exposed in such a scenario.
'Passive doesn't predict the future, it doesn't predict the winners and losers. I wouldn't be totally surprised if, in aggregate, the markets go backwards or don't do anything over the next 10 years, but people in the right positions could make a fortune.'
Near-term, Mr Douglass is in agreement that the most AI-exposed industries include advertising, entertainment, accounting, law and consulting. Funds management could suffer too, since AI can do the work of analysts but cheaper and faster.
'There will be people who are earning hundreds of thousands of dollars a year and within five to 10 years, maybe 50 to 70 per cent of those jobs just will not exist anymore,' Mr Douglass warned.
'What happens then to demand for goods and services? We used to own LVMH. If you go five to 10 years out and you start mass losses over a five to 10 year frame, when 20, 30 or 40 per cent of the professional workforce around the world don't have jobs, who's going to be spending $6,000 on a handbag?
'As you accelerate this over time, businesses you think are wonderful today, you start saying to yourself, 'what happens if the customers don't have the money?''
There will be a version of this dilemma undermining most sectors, Mr Douglass predicted.
'I love a business like Hilton. But they predominantly serve small and medium-sized businesses for business travel in the US. So what happens if 30 or 40 per cent of these businesses have laid off their workforces in 10 years time? What's the demand going to be for business travel when there's less people employed?'
White-collar jobs are already being encroached upon. Tech giants Amazon, Meta and Intel are among those that have announced mass lay-offs this year.
Closer to home, CEOs including Commonwealth Bank's Matt Comyn and Telstra's Vicki Brady have been alert to the AI reality and the opportunity to reallocate labour. Mr Douglass had little optimism that AI will create the new jobs optimists have described.
'Some of the large tech executives are out there publicly saying, 'oh, well jobs are always to be found'. But that's not what they're saying privately. In private they're saying, 'these jobs are gone forever',' Mr Douglass said.
The so-called godfather of AI, Geoffrey Hinton, suggested tradespeople such as plumbers would have more secure employment in an AI-dominated future but Mr Douglass said that's not strictly true.
For governments, a flow-on effect of mass job cuts includes surging benefit claims, slumping taxation revenue and ballooning budget deficits. Consumer demand will evaporate, he warned.
'Positioning yourself for the medium term has never been more important because the markets can react very savagely and very quickly when something starts becoming obvious,' he said.
Safer options could include the likes of McDonald's and Amazon the stockpicker said, with the caveat neither were firm predictions.
'McDonald's may well be fine because it's down the discretionary income curve, and people need to eat. Supermarkets may be fine, Amazon may be fine; they own a physical distribution network and we're going to have to consume food.
'And if something's disrupted, you want to exit. You don't want to be in Kodak at the end.'
Originally published as Magellan co-founder Hamish Douglass's grim artificial intelligence warning: 'Half the index could collapse'