The rise of artificial intelligence has provided a veritable feast for equity markets and an opportunity for investors to get their teeth into something that for many years was a niche subject.
Looking ahead however, it may be other sectors that stand to benefit, or at least hold key diversification benefits when they are needed.
Positioning a global equity book has become increasingly difficult, with index concentration in many regions at all-time highs and the US market now accounting for 63.8 per cent of the MSCI All Country index at the end of March, and 70.9 per cent of the developed market only variant (MSCI World).
In the passive arena, to navigate the concentration issue, the S&P 500 equal-weight index has been a popular, and for many disappointing, choice. It has underperformed by some 9.5 per cent in US dollar terms on a total return basis over the year to the end of April, according to Morningstar.
Some active managers have rightly stuck to their knitting and hoped for the whole ordeal to blow over, others have felt empowered by stock-picking inside the magnificent seven, particularly in recent months as the seven have become more erratic.
From the perspective of asset allocation, the argument on positioning boils down to diversification.
We are dealing with other people’s money and so should exercise some basic common sense when building a portfolio; by simply considering that no trend or market dynamic will last forever.
Of course, the industry likes to make it sound a little more complicated and from an equity standpoint we often see country, sector, factor and style pinpointed as sources of diversification.
In the journey to implementing AI across the wider economy, the market will stumble upon evermore pinch points. The old picks and shovels adage has been in full swing.
Nvidia has been the big nugget, but some old gems have been dusted off, such as AMD and Intel, only to be discarded as cheap imitations more recently.
Say an investor wanted to at least think about benefiting from the AI theme in a more diverse manner. Beyond the immediate supply chain, are other murky aspects of the global economy waiting to be uncovered as plays on AI, or indeed other themes such as electrification?
Mining and to a lesser extent the energy sector have become eschewed by the equity market. Many fell by the wayside after the end of the commodities super-cycle and again in the mid-2010s fallout.
Technological progression, however, means we are required to dig up many materials in increasing quantities for transformation into the chips needed to power increasing electrification, our smartphones, our smart homes and now our particularly power-hungry AI/smart assistants.
As is often the case, trade buyers know where the value lies long before the hungry investing pack appear. Does BHP’s lunge for Anglo American and its prized copper assets contain some signal?
