Investors Are Seeking "AI-Safe Havens": How They Can Diversify Their Portfolios

The skyrocketing rise in the stock prices of companies in the artificial intelligence sector is prompting some investors to pour more and more money into it, while others are looking for ways to diversify and reduce the risk of a potential crash in tech stocks. Where are they looking for new ideas?

The Nasdaq-100 index, which tracks the largest U.S. technology companies, has risen by more than 19% since the start of the year and by nearly 40% over the past year. One sign of the AI boom was SpaceX’s IPO: it was priced at a company valuation of nearly $1.8 trillion, which rose by more than 20% over the following week of trading.

Even more incredible results are being posted by technology giants in Asia that manufacture AI equipment, primarily microchips. Over the past year, Taiwan’s stock index—in which TSMC, the world’s largest manufacturer of advanced chips, accounts for nearly 42%—has doubled, while South Korea’s Kospi, where Samsung Electronics and SK Hynix account for nearly 55%, has tripled.

In Japan, where the Nikkei 225 index soared by nearly 80%, Toyota Motor ceased to be the largest company by market capitalization after 22 years. It was replaced by the investment firm SoftBank, which has invested in OpenAI and data centers. SoftBank, in turn, was quickly displaced from the top spot by Kioxia, a little-known memory chip manufacturer.

Against this backdrop, investors are beginning to realize that there may be undervalued stocks in the market that are virtually unrelated to AI, according to Goldman Sachs traders. These are stocks from so-called cyclical sectors, whose businesses are tied to economic cycles, according to Bloomberg’s coverage of the bank’s comments.

Since the beginning of the year, a basket of stocks from these S&P 500 companies has risen by 11%, lagging behind the technology sector. The conclusion of a peace agreement between the U.S. and Iran (although the prospects for negotiations between the two countries on Friday, June 19, were called into question), rising volumes of oil and gas exports from the Persian Gulf—where they had been blocked for more than three months— and falling oil prices—all of this should at least partially alleviate inflation concerns and help companies such as retail chains, regional banks, airlines, and real estate developers, according to analysts at 22V Research.

"The easing of supply-side shocks and inflationary pressures increases the likelihood that the economic cycle will continue," says Kevin Broks, director of 22V Research.

On June 17, the Fed left interest rates unchanged, and market participants no longer expect them to be cut this year. This has already played into the hands of banks: hedge funds, anticipating a hawkish stance from the Fed, have been making net purchases of their shares for three weeks in a row, notes Goldman Sachs. Investors appear to be “taking their foot off the gas” somewhat in the AI sector to make room in their portfolios for stocks from other sectors, the bank’s report states.

The European market could be a good alternative to the AI sector and the U.S. market, writes Jason Zweig, columnist for “The Intelligent Investor” in The Wall Street Journal.

In the S&P 500 index fund, 47% of investors’ assets are invested in stocks from just two sectors—technology and telecommunications—with nearly 8% coming from Nvidia alone, Zweig notes.

The European market, both as a whole and in terms of its individual national markets, is much less concentrated. The largest company in the MSCI Europe Index—ASML, a Dutch manufacturer of chip-making equipment—accounts for 5% of the index. Shares of technology companies as a whole account for about 10% of the European index.

The largest sectors are finance (where stocks were buoyed by the European Central Bank’s recent decision to raise interest rates), followed by manufacturing and healthcare.

The long-term P/E ratio (the ratio of market capitalization to earnings over the past 10 years, adjusted for inflation, CAPE ratio) for U.S. companies currently stands at 41, approaching the all-time high recorded more than a quarter of a century ago—at the peak of the dot-com bubble, Zweig notes.

On the European market, however, this figure—according to Lawrence Black of New York-based Index Standard—stands at just 23, which is far from record levels and even lower than it was five years ago.

“European stocks are cheap for perfectly valid reasons,” says Tim Murray, a capital markets strategist at T. Rowe Price Associates. “Many investors have simply forgotten about them and written them off. And when expectations are low, there’s a greater likelihood of pleasant surprises.”

The results of corporate reforms could be such a surprise, according to Sarah Ketterer, CEO of Causeway Capital Management.

Corporate governance reforms, for example, have become one of the key drivers of growth in the Japanese market over the past decade, enabling the Nikkei 225 to finally reach, in 2024, the high set at the peak of the 1989 bubble. After trading sideways for more than a year, the Nikkei has been on a virtually uninterrupted upward trend since last summer.

In addition, Zweig points out that dividend growth in the U.S. has stalled due to massive spending on AI infrastructure: The dividend yield on the S&P 500 has fallen to 1.1% from nearly 2% in 2022. For European stocks, however, it stands at nearly 3%.

If an investor owns a stock fund, the fund receives dividends paid by companies, which increases the value of the fund’s assets and the investor’s shares.

High dividends are “the safety net that will come into play if developments in the AI sector fall short of expectations,” says Jurien Timmer, director of global macroeconomics at Fidelity Investments. If the bull market in the U.S. continues, “European stocks may not see explosive growth, but if the S&P 500 goes down, they’ll likely fall less,” adds Timmer: “They could serve as a safe haven during a storm.”

The reason to look at other sectors and markets is not just to profit from the potential growth of relatively cheap stocks, Zweig explains. It’s important to remember that by reducing risk in one area, an investor takes on risk in another. European stocks, for example, could suffer if U.S. President Donald Trump decides to raise tariffs again or if Russian President Vladimir Putin instigates a military conflict in Eastern Europe. Furthermore, investors could miss out on the opportunity to profit from AI-sector stocks if growth in that sector continues.

But the point of diversification isn't to own a large number of assets whose value rises at the same time, Zweig explains: "If you do that, their value will most likely fall at the same time, too."

Instead, he writes, you should hold assets whose values change at different rates and at different times: “In the long run, this reduces your risk.”

This article was AI-translated and verified by a human editor