Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
‘Respect the data’ on the Magnificent Seven: Allspring
Flooded with flashy PowerPoint presentations and suffering from not a little future shock, investors are still grappling with what the advent of artificial intelligence (AI) means for markets.
“Even hindsight isn’t 20/20,” says Wai Lee, global head of research for Allspring’s Systematic Edge team. “In the 90s it took us a while to figure out what the internet and other technologies would do for productivity growth. And we’re still not sure to what extent globalisation improved margins, though there are a number of estimates. A year or two ago deglobalisation was a hot topic.”
“I think it’s natural for many of us to focus on the positive impacts of AI. And there have definitely been some. But more and more the flipside is, while it promotes productivity on some things, does it take away productivity on anything? Let’s not forget about the net impact; there could be non-positive or even negative impacts. Some jobs go away, and it might take the economy some time to reinvent itself or adjust and create new kinds of jobs.”
The Magnificent Seven stocks (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) have been beneficiaries of AI hype, with a combined market capitalisation greater than that of some non-US stock markets. That phenomenon has investors worried about over-exuberance, and a repeat of the previous disasters about too many piling into too few stocks.
“But index concentration is the norm, and it has always been the norm,” Lee says, pointing to research from Hendrik Bessembinder, which shows that only a very small number of stocks have outperformed Treasury Bills. “In the US, which has the longest history, you only needed to hold the best performing four per cent of stocks to carry the whole market return for the century. The other 96 per cent just match T-Bills.”
“Let’s respect the data; index concentration and a small per cent of names carrying the load has been the norm. And I think you can look at it two ways. As active investors we feel the challenge. Because we have to pick names that’ll beat the index. But you can think of it the other way; concentrated portfolios that are missing the Magnificent Seven might miss the boat. As an active investor, our job stays the same.
Many investors “leap to judge” the Magnificent Seven and say they’ll blow up or correct, but Lee says their outperformance can be attributed in large part to factor exposures.
“They are growthy, they’re large; but they’re profitable, they’re robust and they’re resilient. Factors explain a lot of their outperformance and then the rest, maybe 30 per cent of their outperformance, could not be. Maybe we extrapolate too much about AI boosts to profit, productivity and economic growth.”
