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The ChatGPT Effect & What Australian Investors Should Do About It
When Bank of America CEO Brian Moynihan proudly declared he’d slashed his company’s workforce by nearly 90,000 over the past fifteen years and that he wasn’t done yet, he wasn’t just reflecting on a company-specific trend. He was eluding to a structural shift unfolding across the global economy.
With the rise of generative AI tools like ChatGPT, businesses from Silicon Valley to Sydney are embracing automation with renewed urgency. The implications for productivity, employment, and ultimately, portfolio performance are profound…
AI’s Productivity Promise as a Profit Growth Engine
AI has long promised productivity gains, but ChatGPT and its peers have made that future suddenly real.
AI can already write code, summarise legal documents, handle customer service queries, and draft marketing copy, tasks that once demanded entire teams of humans.
This is leading to massive real world consequences.
In the US, Wells Fargo has reduced headcount by 23% over five years, using ‘attrition as our friend’ as their motto. Intel is cutting 15% of its workforce. Verizon’s CEO calmly notes staff are ‘going down all the time’. The list goes on.
The driver of falling staff numbers isn’t just efficiency. It’s market pressure. Investors are expecting the type of earnings growth that requires companies to push harder with their three main levers: higher prices, greater productivity, and lower costs. With inflation-weary consumers pushing back on price hikes, cost-cutting, particularly labour costs, is often the path of least resistance.
Australia’s Moment of Reckoning
Australian investors face a unique AI-related dilemma.
While local stocks hover near record highs, profitability across the market has declined for three consecutive years. Unlike US tech giants that are still delivering strong earnings growth, many local companies are running hard just to stand still.
Against this challenging backdrop, wages growth is making labour costs the bad guy in the minds of more and more local management teams.
It’s easy to understand why. Since the pandemic, wages have been growing at nearly 6% p.a., a dramatic jump from the 1% p.a. pre-COVID average. The recent 3.5% rise in the national minimum wage has been adding to that upward pressure.
As Morgan Stanley strategist Chris Nicol notes: ‘persistency of labour cost growth (amplified by poor productivity) has the potential to challenge margins.’ He’s right. For companies unable to match those cost increases with productivity improvements, or pass them on through price rises, margin compression surely looms.
So expect to hear more about ‘efficiency drives’ during the August reporting season. From Telstra and Westpac to Woolworths and Transurban (which recently announced a 7% workforce cut), the push to rein in labour costs is gathering momentum.
The implication is clear: the power balance between labour and capital appears to be swinging back in capital’s favour.
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ASX Sectors Most at Risk & Most Likely to Benefit
It’s no understatement that the global investment landscape is being reshaped by AI.
McKinsey estimates that generative AI could add up to $US4.4 trillion annually to the global economy. Goldman Sachs projects a 7% boost to global GDP over the next decade due to AI adoption. Yet they also predict that 300 million full-time jobs could be automated in some way. That’s a lot of social upheaval and economic change to digest in the coming years.
For investors, the challenge is clear: identify which businesses are most vulnerable to wage pressure, and which are best placed to harness AI’s advantages.
Morgan Stanley’s data offers some clues.
Labour-intensive firms such as Ramsay Health Care (64% labour-to-revenue), Hub24 (62%), WiseTech (59%), and Seek (40%) could face pressure if they can’t automate fast enough.
More generally, the industrials, healthcare, and financial services sectors appear vulnerable to rising labour costs.
Meanwhile, firms with scalable, high-margin business models and strong AI adoption such as Technology One, Xero, and REA Group may benefit from operational leverage as they deploy AI to do more with less.
At a sectoral level, tech, logistics, and software-as-a-service (SaaS) players could see margin expansion, especially if they’re early adopters of AI tools.
Positioning Your Portfolio for the ChatGPT Era
For Australian investors looking to benefit from the AI revolution, here’s a strategy checklist:
1. Tilt Towards Structural Winners
- Look for assets and sectors with high gross margins, low labour intensity, and scalable tech platforms. These will benefit most from productivity gains and can reinvest freed-up capital into compounding their growth.
- Sectors poised to be structural winners include AI-focused semiconductors, cloud infrastructure, and AI-enablers such as enterprise automation tools and cybersecurity solutions.
2. Go Global
- Don’t be limited by the ASX. Many of the biggest beneficiaries of AI are US-listed: e.g. Microsoft, Alphabet, Amazon, and Meta.
- Global technology-focused ETFs like Betashares Nasdaq 100 ETF (ASX: NDQ) and Global X FANG+ ETF (ASX: FANG) offer exposure to these global winners.
3. Explore Thematic ETFs Positioned to Benefit
- Productivity gains alongside workforce disruption is fertile ground for long-term thematic investing. So consider thematic ETFs positioned to benefit as the AI rollout accelerates such as:
- Global X ROBO Global Robotics & Automation ETF (ASX: ROBO): Global robotics and automation players are in the AI frontline.
- Global X Battery Tech & Lithium ETF (ASX: ACDC): Advancing clean technologies will be required by the AI revolution due to rising energy demand.
- Global X Cybersecurity ETF (ASX: BUGG):The future of AI depends on the future of cybersecurity.
4. Avoid Labour-Heavy Laggards
- Steer clear of companies with rigid cost bases, limited automation potential, and shrinking margins. As per the Morgan Stanley data, avoid companies with 40%+ labour-to-revenue ratios. Watch for signs of falling staff productivity, union disputes, or poor digital transformation strategies.
5. Stay Nimble & Be Ready for Volatility
- There’s a significant risk that AI adoption may cause economic dislocation, especially if jobs are shed faster than new industries can absorb them. So it’s becoming more important that investors monitor productivity, wage inflation, and unemployment.
- Also, be wary about the more extreme negative outcomes which could eventuate. If AI adoption causes a deflationary effect on wages and demand, it could slow global economic growth. Rising inequality, political backlash, or over-hyped valuations in speculative AI names (as flagged by Goldman Sachs’ red-alert speculative indicator) could cause turbulence.
- Holding a solid cash weighting and maintaining a defensive portfolio allocation is likely to help investors navigate any future volatility.
6. Look for Secondary Beneficiaries
- Finally, remember that not all AI winners will be technology companies.
- For example, real estate firms leasing to data centres, infrastructure providers enabling cloud expansion, or consultancies helping enterprises adopt AI may offer strong upside due to the AI revolution.
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A Shift as Big as the Arrival of Electricity is Occurring
Generative AI is not just a trend. It’s a foundational shift akin to the arrival of electricity or the internet. While the pace and breadth of change will vary across industries and borders, investors who grasp the structural forces at play will be better equipped to navigate volatility and capture the upside potential.
In Australia, where profit margins are already thin and labour costs high, the economic impacts of the AI rollout are likely to be mixed. Whilst ChatGPT is likely to cost jobs, it will also create wealth. Make sure your portfolio is aligned with the latter.
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Invest in robotics, automation and artificial intelligence.
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Invest in the energy storage and production megatrend.
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Cybersecurity is not a feature, it’s the future.
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Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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Simon Turner
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