Stuart Kirk begins by noting that investors' views of the world differ, but what matters most is whether a portfolio is consistent with those views. He recalls his past allocation to US equities, which he avoided when he thought the S&P 500 was overvalued, arguing that owning only UK or Japanese stocks while holding no US exposure was internally inconsistent given the US's weight in global markets.
Kirk says he sold all his stocks when a prolonged bull market unsettled him last year, then made a small purchase of US equities when he returned to the market. He still believes artificial intelligence companies are too expensive, and says the related debt binge resembles past booms and busts. Ray Dalio, founder of Bridgewater Associates, recently called AI a "classic bubble" and said the market is "approaching" the point where such bubbles tend to pop.
Kirk argues that investors no longer need to abandon their other equity holdings to stay consistent. When AI took off after the pandemic, even companies least linked to AI, such as supermarkets, utilities and energy firms, had a 0.5 correlation with a global AI index. That correlation has since fallen to minus 0.4. Recently, when Google and Nvidia dropped, Duke Energy and Coca-Cola tended to rise. Stocks most linked to AI still have a strong 0.8 correlation with the index, but the gap between the two groups is the widest on record.
On the worst 10 per cent of days for returns, the AI index fell about 2 per cent on average, while the least AI-linked fifth of stocks was roughly flat. Kirk cautions that these down days are far from a severe crash, and that higher borrowing costs, which Dalio sees as the likely trigger, could still hurt defensive sectors such as utilities. He adds that global diversification offers some help, since the MSCI All Country World Index fell about 1 per cent on those days.
Source: Financial Times Markets · Summarized by HeadlinesBriefing