After US stocks dropped sharply on Thursday, led by semiconductor and AI infrastructure companies, and as investors assessed how the US mid-term elections might hit data-centre development, wealth managers react. Many remain constructive on the long-term outlook, but they argue that investors must diversify.
Market volatility increased significantly last Thursday,
particularly across US technology, semiconductor and AI-related
companies. The turbulence was diven by concerns that
Democratic gains in the US midterm elections could result in more
regulation of AI and tighter restrictions on data centre
development, potentially slowing the pace of the AI
infrastructure build-out.
This was a reversal from the initial post-election rally, when
markets had responded positively to expectations of a potentially
more conventional policy backdrop. The S&P 500 fell 4.4 per
cent and the Nasdaq fell 5.5 per cent on Thursday. The
Philadelphia Semiconductor Index fell 12.3 per cent, extending
its drawdown since June to around 38.3 per cent. Pressure
extended into Friday, with North Asia”s tech-heavy indices
leading declines.
Mark Haefele, chief investment officer at UBS
Global Wealth Management, views the decline as a positioning
reset rather than indicative of a lasting downturn in the AI
investment cycle. He sees upside in broad equity indices over the
next six to 12 months. “At the same time, with further volatility
possible, investors should focus on managing concentration risks,
rebalancing excessive technology exposure, and building a strong
multi-asset core portfolio,” Haefele said.
“We believe the AI investment cycle remains intact, corporate
earnings growth is resilient, and a positive global cyclical
backdrop should support equities,” he added. “While we could see
a period of market indigestion following the election results, we
do not think fundamentals justify a prolonged downturn.”
Enrico Chinello, Next Generation Research, at Swiss private bank
Julius Baer,
also thinks the market could be misplacing the risk. “There
continues to be bipartisan support on AI as a national strategic
topic, and federal AI rules face a presidential veto. The more
tangible risk could come from states curbing new data centre
developments, particularly in Texas,” Chinello said. He sees a
base-case scenario where developments are slowed down at the
margin but are not entirely halted. He remains constructive on
the cloud computing and AI theme.
Daniel Nilsson, senior fund manager at advisory firm Isio, has also not changed
his long-term investment view. Nilsson remains constructive on
equities over the longer term, supported by generally resilient
corporate earnings and economic activity, while recognising that
valuations and market concentration, particularly within US
mega-cap technology, warrant some caution. He does not believe
that short-term volatility of this nature is a reason to trade
around his strategic positions.
“Diversification beyond US mega-cap technology remains important,
with global small caps and emerging markets offering exposure to
different regions, companies and drivers of return,” Nilsson
said. “Emerging markets have also experienced a more difficult
period amid recent volatility, reflecting the significant
semiconductor and technology exposure in parts of Asia. The
latest selloff extended into Asian chipmakers following
Thursday’s US moves.” However, he continues to believe
that emerging markets offer attractive long-term opportunities.
“Infrastructure has provided a useful counterbalance to broader
market volatility. Its return drivers can differ from
broader equity markets, helping to diversify portfolios during
periods when more growth-oriented areas are under pressure. This
has been particularly evident during the recent sell-off, with
infrastructure demonstrating its ability to provide stability
when technology-related equities come under pressure,” Nilsson
said.
“Fixed income can also play an important role in diversification,
particularly in areas with limited direct exposure to technology
and AI. Asset-backed securities and shorter-duration credit have
held up well through the recent volatility, highlighting the
benefits of exposure to different sources of return.
“Overall, we remain comfortable with our long-term investment
outlook and do not believe the recent volatility warrants a
significant shift in strategy. The recent selloff reinforces the
importance of avoiding over-reliance on any single region,
sector, or investment theme, particularly when market
concentration and elevated valuations remain key risks.
“We therefore remain focused on staying invested and maintaining
this diversification, while remaining flexible enough to respond
to changing market conditions and take advantage of opportunities
as they arise, rather than attempting to trade around short-term
volatility,” Nilsson said.
His stance was shared by the CIO Office at Swiss private bank
Lombard Odier
which believes that the long-term case for AI remains intact. The
bank views the recent weakness in AI-related stocks as an
unwinding of crowded positioning, rather than a sign of slowing
demand, earnings or capex growth.
“Bond yields have continued to fall during the equity selloff.
That indicates that inflation fears remain contained.
Importantly, the bond market is not signalling recession; rather,
it is pointing to slower but sustainable economic growth. The
sharp AI-driven correction has unsettled market sentiment but
does not alter our investment outlook. The bond market is
signalling easing financial conditions,” Lombard Odier said.
Overall, the bank believes that theequity market moves look
more like a reset in expectations. It expects the narrow AI-led
rally to extend beyond a handful of mega-cap stocks to other
sectors and regions. “This should leave the long-term case for US
equities intact. We see corrections of this magnitude as
opportunities to add exposure and have rebalanced our portfolios
accordingly,” the bank said.
Meanwhile, Pruksa Iamthongthong, head of APAC equities at
Aberdeen
Investments, thinks near-term volatility could continue as
the market assesses potential delays to US data centre
construction and constraints on compute capacity.
Over time, Iamthongthong expects the impact to be manageable.
“Structural demand for AI and compute remains strong, even if
some investment is delayed. Capacity can also move
geographically,” Iamthongthong said. “Hyperscalers are building
infrastructure outside the US, which could benefit Asian
companies and supply chains that can bring new compute capacity
online. China is also developing its own AI ecosystem across
chips, data centres, power equipment, software and applications,
giving investors another source of AI demand beyond the US.”
“Asia’s investment case is also much broader than AI. Earnings
opportunities extend across financials, consumer businesses,
healthcare, industrials and domestically-driven companies, while
recent corrections have reduced some of the crowding and
valuation pressure in technology.
“There has been heavy selling in this risk-off moment, and we are
seeing some stocks correct beyond their expected earnings impact
and fundamentals, and therefore, value is starting to emerge.
This provides opportunities for active investors like us to buy
into or add to quality companies with intact fundamentals at even
more attractive valuations,” Iamthongthong said.
Ben Seager-Scott, chief investment officer at Forvis Mazars
is also wary of calling this the end of the AI story,
since this is about the fifth time in the last 12 months that
they have had a sharp fall and each time they have rallied.
“The other point to highlight is that these hyperscalers have
actually been lagging the broader market over the last couple of
years. For our own stance, we don’t think there is a technology
bubble to burst – rather, we think that other stocks will simply
outperform as they take advantage of productivity gains. We’ve
been moving progressively underweight US mega-cap technology
names through this year, favouring instead an equal
weighted index that reflects the performance of the average
stock in the index,” Seager-Scott said.