Investors shelter from AI rout in asset-heavy stocks
With bearish sentiment weighing heavily on AI-related stocks in the US, investors have found shelter in “old economy”, asset-heavy companies.
Sectors such as utilities, energy and materials have emerged as winners from the AI anxiety gripping Wall Street, as investors flee sectors seen as vulnerable to disruption. Instead they seek businesses with tangible assets.
The S&P 500 software sub-index last week tumbled to its lowest level since the immediate aftermath of President Donald Trump’s “liberation day” tariff announcement last April, losing $1.2tn in combined market capitalisation in less than a month.
This group has borne the brunt of worries that new AI tools could upend entire industries, including wealth managers and insurers.
Meanwhile the S&P 500 utilities sub-index is up more than 10 per cent this year, while energy stocks have gained 22 per cent, as sectors with substantial physical assets find themselves suddenly back in vogue after years of underperformance relative to asset-light tech business.
“All these capital-light businesses that could scale historically are also the ones that could be easily disrupted,” said Guillaume Jaisson, European strategist at Goldman Sachs.
On the other hand, “capital-heavy businesses are difficult to replicate, it takes time”, Jaisson said.
Capital-light business models were particularly sought-after in the low interest rate environment that followed the global financial crisis, as investors focused on easily scalable business models at a time of easy borrowing conditions.
But a rise in interest rates since the pandemic has put pressure on these valuations at a time when investment has increased in capital-intensive sectors such as defence and infrastructure.
“The thing that has been working best for the last 15 years is now the most vulnerable,” said Gerry Fowler, head of derivatives strategy at UBS. “The avoidance of things at the moment centres around: is your business based on intangibles and intellectual property?”