Stocks Tumble Over AI Fears – Who’s Safe?

Tools like ChatGPT and Microsoft Copilot, which appeared seemingly out of nowhere a few years ago, are now everywhere. These tools have become integral to many industries, signaling a shift that could be as transformative as the industrial revolution.

Companies are increasing their investments in AI technology, believing it has the potential to revolutionize various sectors. As major players like Meta and Microsoft pour billions into AI development, concerns are growing about its impact on industries such as software and wealth management, with fears of job losses and economic disruption.

The financial markets have not been immune to these changes. In recent weeks, the introduction of new AI tools has caused significant fluctuations in stock prices, particularly affecting tech companies. Investors are worried that AI could disrupt various fields, from finance to law and coding, leading to uncertainty and anxiety.

Some sectors are already showing signs of being affected. For instance, Games Workshop's shares have dropped by around 10% in the last month, with some analysts suggesting that discussions around AI may have contributed to this decline. The company recently banned its staff from using AI to design its miniature action figures, highlighting the growing concerns within the industry.

Investors are now asking what comes next. Which other industries could be at risk from AI developments, and are there any areas where investors can find stability in this rapidly changing landscape?

Data and software providers are likely to remain in the 'eye of the storm' as investors navigate the impact of AI. Richard Hunter, head of markets at Interactive Investor, believes data firms will continue to face challenges. He explained that AI can process data quickly, potentially eroding profits. However, he also noted that if the data remains the property of the company, the impact might be lessened.

On the other hand, Chris Beauchamp, chief market analyst at IG, suggests that companies like Relx, Informa, and Pearson, along with businesses such as Sage and Darktrace, are at risk. Susannah Streeter, chief investment strategist at Wealth Club, added that companies relying on online-only services that can be integrated into large language models may suffer the most. Those charging high fees for complex services that AI can simplify will also be hit hard.

Wealth management firms like Hargreaves Lansdown and St James's Place may also feel the effects of AI advancements. A new tool by Altruist Corp, led by former Wall Street executives, is designed to help advisers with tax strategies and client administration. Beauchamp pointed out that AI can replicate the services these firms offer, making high-fee, labor-intensive models vulnerable. If AI can do it cheaper, customers will eventually switch, according to Beauchamp.

Hunter from Interactive Investor mentioned that AI could reduce administrative tasks and explain complex areas of taxation and finance to customers. This could enable wealth managers to reach more clients with a simpler proposition. However, he also noted that AI cannot replace the comfort of face-to-face interactions where empathy plays a crucial role.

Consumer portals such as Rightmove, Autotrader, and Baltic Classifieds have seen fragile performance in recent months. Dan Coatsworth, head of markets at AJ Bell, explained that newer search facilities on generative AI platforms are giving users different ways to search for things like houses or cars. This means portals must improve their offerings and invest more to remain essential.

Retailers are also under pressure. One of the biggest issues for online shoppers is the variation in clothing sizes, leading to numerous returns. AI has the potential to reduce returns by mapping precise measurements of clothing onto a digital image of the shopper. This could lead to more efficient sales and cost reductions for retailers.

AI could also be a double-edged sword for fashion retailers. While it may negatively impact designers, it could benefit companies by enabling them to bring products to market faster and at lower costs. This highlights how AI can both remove jobs and increase efficiency.

Consumer goods businesses like Unilever and Reckitt face subtler risks. While they are not currently at grave risk from AI, they could be a sector to watch in the future. AI could help smaller competitors chip away at market share, leading to margin compression rather than obsolescence.

Car insurance is another area to monitor. Shares in British insurer Admiral have declined by around 10% in the last month. US insurer Lemonade launched cover for autonomous vehicles, which is half the estimated cost of traditional car insurance. This represents a radical shift in the insurance sector and could be bad news for companies like Admiral.

This raises questions about liability in accidents involving fully self-driving cars. If the human is not controlling the vehicle, would that mean car insurers like Admiral lose business to commercial insurers? This presents a new challenge for the sector, contributing to the slump in Admiral’s share price.

Businesses involved in utilities, energy, and commodities seem to be faring well amid AI-related turbulence. Beauchamp of IG noted that these sectors are largely insulated from the turmoil, as they rely on physical assets, regulated monopolies, or brand scarcity that AI cannot replicate. Infrastructure and commodities look structurally safer than anything charging fees for information or advice.

Investors with holdings in firms like National Grid, Severn Trent, SSE, Shell, and Rio Tinto may find themselves in a solid position as AI continues to expand its influence.