The intangible era is over. This past week has felt like another week when decades happen. Questions never raised about long-standing business models and perceived ‘moats’ collided headfirst into the disruptive side of AI. I don’t think we have seen the last of it. The back and forth of AI productivity and AI disruption means more S&P 500 whipsawing. I think the dips should be bought, but today’s note is about what to buy and what to stay clear of. Stocks heavily exposed to Intangible Assets {UBXXINTG} remain the most at risk, while the era of real Tangible Assets {UBXXTANG} may just be getting started. I don’t expect it to be a straight line, but in the new world of AI disruption, owning tangible assets presents the strongest defense. The investment implications of this trend are many, but my favorite trades include: (1) Short XBI, (2) Long MDY, (3) Long KRE, and (4) Long EEM/EWZ.
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7 min read
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1) What’s Driving Markets
- This year, stocks with a higher share of intangible assets have underperformed stocks with a higher share of tangible real assets. Out of a 1,700-stock universe, the top two decile cohorts of stocks when ranked by their ‘intangible asset intensity’ have both sold off nearly 8% (Chart 1). Simply put, AI is coming for intangible businesses, but tangible real assets remain more insulated from AI disruption. This is also clear when looking at some of the worst performing themes this year: Software -22%, Internet -21%, Gaming -25%, and even Wealth Managers -8%. This compares to the best performing themes this year: Metals & Mining +20%, Short Cycle Industrials +20%, Energy +16%, and Memory +59%.
Chart 1
Source: Bloomberg, UBS
2) AI Disruption Meets Cyclical Reacceleration
- Adding fuel to the fire, the macro backdrop is increasingly supportive of tangible asset heavy businesses. The cyclical reacceleration theme that we have been endorsing is underway (Top Trades for 2026). The number of encouraging macro data points, like last week’s historic ISM Manufacturing PMI, continue to grow and the charts consistently point to a story of cyclical reacceleration (Chart 2).
Chart 2
3) Tangible Assets vs. Intangible Assets {UBXXTANG vs. UBXXINTG}
- We set out to measure the ‘intangible asset intensity’ for the individual stocks in our US equity universe. We rank all 1,700 securities with a composite intangible asset score which captures balance sheet tangibility (PP&E/Assets), reinvestment mix (Capex vs. R&D), and capital intensity among other financial metrics. REITs and Financials are excluded due to lack of data availability and consistency. The result is two 100-stock baskets:
- Tangible Assets Basket {UBXXTANG} – This basket offers broad, cross-sector exposure to stocks that are tangible asset heavy. The most represented industries include Mining, Energy, Utilities, Aerospace, Restaurants, and Transportation. This basket, which is up 18% this year, also has a pronounced cyclical tilt.
- Intangible Assets Basket {UBXXINTG} – Stocks with the highest intangible asset intensity hail from Software, Biotech, Internet, and Media. Companies with high intangible assets often possess one of three perceived ‘moats’—Digital, Scientific, or Brand. Brand moats seem still shielded from AI disruption, so most of the stocks in this 100-stock basket possess Digital or Scientific moats.
Chart 3
4) Investment Implications
- The rotation has been unrelenting to start the year, but I don’t believe it’s entirely done. If it does have legs, the investment implications are numerous. The end of the ‘intangible era’ could mean more rotations as the composition of indices and investor portfolios have been biased by years of outperformance which came to a head this year.A few thoughts:
- Thematic Exposure: Portfolio exposure should lean heavily into tangible real assets. The chart below shows the average ‘intangible asset intensity’ by industry group as an approximation but it looks mostly intuitive (Chart 4).
- Long: Cap Goods, Metals, Energy, Transports, Materials, Airlines, Defense Primes, Restaurants, Utilities
- Short: Software,Biotech, Internet, Media, Professional Services
- Regional Exposure: EM ex-China > Europe > USA
- Style Preference: There is plenty of overlap between value, cyclicality, and tangible asset heavy companies. The same is true for growth and intangible asset heavy companies. This is best expressed via the pair trade: Pure Value vs. Pure Growth {UBXXPVAL vs. UBXXPGRO}, which is up 20% already this year.
- What About AI? Exposure to tangible real asset businesses is paramount, ideally that exposure is also critical to AI. Thus AI Power {UBXXVOLT}, AI Semis {UBXXSEMA}, and AI Winners {UBXXAIW} should still be fine.
Chart 4
Source: Bloomberg, UBS
5) Trade Recommendations
- Some old and some new trade recommendations below influenced by our analysis of the tangible vs. intangible asset divide. We highlight just four trade ideas today, but the list could be much longer.
- Short XBI (Biotech) – This may be controversial, but I do see similarities to Software in Biotech. Much like Software, Biotech is a highly intangible business but in the case of Biotech, the ‘moat’ is Scientific rather than Digital. Also, like Software was at one point, Biotech is believed to be an AI winner at some point in the future. That was originally part of the bull thesis for Software, but it has not turned out that way (Unresolvable Existential Threat). Timing, as they say, is everything, but after an 85% rally off the Liberation Day lows, an AI breakthrough in the realm of drug discovery could reduce the value of scientific IP, pushing Biotech to the other side of the ‘AI Risk’ divide (Chart 5).
- Long MDY (Mid Caps) – We continue to highlight MDY as one of our top picks for 2026. As an index, MDY still has all the right exposure and notably has outperformed not only the S&P 500 index but the Russell 2000 this year (Chart 6). Despite 9% outperformance this year, Mid Caps still trade at a 4x P/E discount to the S&P 500.
- Long KRE (Regional Banks) – Like Mid Caps, we continue to highlight KRE as one of our top picks for 2026. The best performing Financials subsector and in fact the only one in the green, Regional Banks are up 9% this year. But do they have exposure to tangible or intangible assets? While bank balance sheets are comprised of loans, the collateral for those loans is mostly tangible (how banks are valued). And of course, banks remain a clean way to play for a cyclical broadening. In fact, out of 150 baskets in the US, Regional Banks have the strongest earnings revisions momentum.
- Long EEM / EWZ (EM / Brazil) – It remains a great macro backdrop for EM equities and especially classical commodity-exposed countries like Brazil via the EWZ ETF. An end to the ‘intangible era’ and the beginning of a commodity cycle would help push EWZ back to levels not seen in over a decade.
Chart 5
Chart 6
