Second, there’s Latin America.
Equity markets in this region have had a low correlation with AI and momentum in recent years and have largely been overlooked by investors. Latin America makes up just 0.8% of the MSCI ACWI, yet accounts for 7% of global GDP, according to BlackRock analysis. We believe that gap may close over the coming years.
Brazilian .BVSP and Mexican .MXX stocks are also trading at a discount to their historical valuations, whereas most major markets trade at a premium. Potential catalysts for a rerating include any near-term interest rate cuts, which should benefit these countries’ domestic economies, and, over the longer term, rising commodity demand driven by AI and electrification.
Finally, the UK — my home market — has a low, 0.26 correlation to AI and has proved resilient during several years of market turbulence driven by the COVID-19 pandemic, geopolitical conflict and inflationary spikes.
In fact, over the past five years, the FTSE 100 .FTSE has outperformed global stocks on a total return basis – and it has done so without much, or any, pure AI exposure.
One of the UK market’s main attributes is its exposure to “old economy” sectors that are less vulnerable to AI disruption, such as financials, materials, energy and healthcare. And – as noted with healthcare – there are reasons to think these sectors could benefit from AI, whether through cost-cutting at banks or demand for materials such as copper from AI and electrification.
One potential catalyst for UK equities to close the valuation gap with their developed market peers would be political stability, following a decade in which the country has cycled through six prime ministers. Stability may lead to greater confidence in the economy, encouraging domestic investors to join foreign investors as net buyers of UK equities.
There is an obvious risk with this diversification strategy: AI momentum could keep running while the diversifiers intended to protect portfolios continue to drag on performance. While there are reasons to be positive about the three areas above over the long term, there are few clear catalysts for near-term outperformance against AI.
But the AI trade could stall — whether due to concerns about over-investment or some unforeseen event. We’ve already seen a pullback in the U.S. semiconductor index .SOX just this month. So holding stocks to help weather the storm still seems prudent.
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