Executive summary
- Recent weakness in tech and global equities reflects a reset in elevated expectations for AI spending, monetisation pay-off timeline, and earnings – not a verdict on the sustainability of AI’s longer-term potential.
- AI’s impact now has evolved to “AI Diffusion”, where the influence is broadening beyond chipmakers and hyperscalers to wider industries. Companies that successfully adopt AI to lift productivity may benefit disproportionately, while businesses vulnerable to automation and displacement may come under pressure.
- The global equity opportunity set extends well beyond tech. We see structural opportunity trends with durable growth drivers spanning Disruption, Winners Take All, Policy Beneficiaries, AI Diffusion, and Lifestyle-linked themes.
- Stock picking underpinned by sound fundamental research is key in identifying solid companies with credible earnings and valuations that appropriately reflect the risk.
- With returns ahead potentially normalising and volatility rising, diversification, selectivity, and disciplined risk management matter.
What happened?
Technology-related equities and the wider global equity market have come under pressure as investors reassess the scale of the AI investment cycle and how quickly that spending may translate into sustainable earnings. Alphabet’s1 latest results disappointed against elevated expectations, renewing questions about the returns on substantial investment in AI infrastructure and the pace of monetisation. The market’s reaction reflects how far expectations have risen (and perhaps may have been stretched too far), even as strong businesses can be vulnerable to volatility when valuations and positioning leave little room for results to fall short.
There is little debate around the productivity gains stemming from AI adoption. Nonetheless, AI-related investments require significant capital commitment, while the timing and distribution of its economic benefits remain some time away. The recent market volatility and share price weakness in selected tech names, should be viewed as a recalibration of expectations and not by itself, evidence that the long-term potential of AI or global equities has run its course.
Our take
We hold to the view that AI can lift productivity, lower costs and support earnings growth across industries over time. This technology is transformative, but the path to monetisation is non-linear, uneven and some companies will be better placed than others to earn an adequate return on their investment, while others may falter. The key is to identify the winners from the losers. In the latter half of October, we have seen amplified share price volatility among companies with high market expectations in the AI supply chain.
Our longstanding view is that AI is a meaningful long-term structural opportunity, but this is not a pure upstream play in the chip manufacturers, hyperscalers, or neoclouds. Instead, we see this as “AI Diffusion” – where the impact from AI is broadening out to wider industries disproportionately in terms of benefactors, and those that would be adversely affected. Companies that can realise productivity lift from AI adoption will emerge stronger, while those that see their products and offerings being increasingly automated or displaced from AI may be under pressure.
Our approach is to focus on business fundamentals, valuation and whether earnings can deliver. Ahead of recent developments, we had already been reducing our AI-factor exposure in the short-term. Such actions reflect active risk management amid changing market conditions.
It is worth mentioning also that global equities offer a myriad of opportunities across geographies, industries, and sectors. The global equity opportunity set is not confined to technology. Beyond “AI Diffusion”, we see structural opportunity trends spanning Disruption, Winners Take All, Policy Beneficiaries and Lifestyle-linked themes. These are supported by durable drivers whose growth runways can extend well beyond the current market cycle. Healthcare, for example, can benefit from innovation and enduring health needs. Dominant financial companies in a “Winners Take All” world may also offer exposure to changing financial services that benefit from rising wealth trends and well-managed business models, while selected consumer businesses with strong brand equity franchises can benefit from evolving lifestyles and consumer spending preferences. The investment case is wide, where our approach is to diligently examine companies on their stock-specific merits and fundamentals, to look for sound well-run businesses with credible earnings, and valuations that appropriately reflect the risk.
Our sell discipline is equally deliberate – we assess whether a holding has reached a reasonable valuation target, whether a more compelling opportunity exists elsewhere, and whether the investment thesis or its underlying assumptions have changed. When warranted, we are prepared to reduce a position and re-allocate capital accordingly. Having a disciplined approach means taking proactive action rather than becoming attached to a holding.
Conclusion
After a strong period for global equity markets, returns may normalise and volatility may rise. This makes diversification across sectors, regions, return drivers, structural themes and other alpha sources more critical in navigating the risks.
The current volatility is a reminder that expectations, earnings delivery, and valuations matter. It does not in itself eliminate the long-term case for global equities, nor the breadth of opportunities beyond AI and technology. We remain constructive over the longer-term. Investors can remain invested while recognising that the journey may be punctuated by intermittent gyrations. Diversification, selectivity and disciplined risk management are essential. We will continue to adapt our portfolios, adhering to our investment philosophy and processes amid evolving market circumstances to navigate the volatility and market cycles.
1 Reference to specific securities for illustration purpose only and does not represent Fullerton’s current view of the security or constitute any recommendation.
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