"The Music Will Stop": Analysts on the Need to Protect Portfolios from AI
The U.S. financial markets and the U.S. economy as a whole are becoming increasingly dependent on the state of this rapidly growing sector
The U.S. stock and credit markets are becoming increasingly focused on AI-related companies. Photo: megaflopp/Shutterstock
The U.S. stock and bond markets are becoming increasingly focused on AI-related companies, according to the Financial Times. This dependence is becoming a growing problem for fund managers, who are trying to find assets and strategies that are not vulnerable to sudden shifts in sentiment toward this technology. The FT surveyed analysts at leading investment firms on how to protect portfolios.
What's going on?
More than two-thirds of the companies in the Russell 1000 Index—which includes large- and mid-cap companies—are connected to AI, either directly or through the integration of this technology into their business models, according to a Citigroup study cited by the FT.
At the same time, according to JPMorgan, following a surge in corporate borrowing in recent years, debt securities issued by hyperscalers and companies benefiting from the boom in AI spending account for about 16% of the U.S. high-quality bond market.
What Analysts Recommend
Clients are being forced to rethink their approaches to diversification, notes Vincent Mortier, Chief Investment Officer at the asset management firm Amundi. According to him, the trend surrounding AI remains very strong, but a sudden revision of corporate earnings forecasts could derail this rally.
“This isn’t inevitable, but I think it will happen,” Mortier said.
“Attempts to build portfolios that include independent, uncorrelated sources of return are in high demand right now,” said Ryan Marshall, global head of strategies at BlackRock. He added that one of the challenges “for multi-asset portfolios, which you’re trying to make broad and diversified,” is “a concentration on AI-related positions.”
“[In addition], there is a second concentric circle of suppliers for this sector, which may be linked to energy, infrastructure, and supply chains,” the expert pointed out, noting that “right now, we’re also seeing a general correlation between economic growth and AI.”
Marshall emphasized that “this phenomenon is driving investors toward private asset classes, hedge funds, and other market segments with lower correlation.” In the hedge fund sector, he highlighted “managers who can demonstrate that the returns they generate are independent of or uncorrelated with” broad debt and equity market risks. These are managers who profit from global movements in currencies, interest rates, and commodities, or who capitalize on the differences between strong and weak companies. Their performance is not tied to the overall trend in the market for tech giants.
Mortier agreed that hedge funds are becoming “extremely” attractive to clients. However, he said, “the problem here is that the hedge fund community is extremely diverse... [The challenge] is to find the right strategies and the right managers who are still willing to accept money.”
He added that clients are also “increasingly looking at emerging markets as a whole”—including stocks and bonds from emerging economies (such as India, China, and Latin American countries) denominated in local currencies.
Another popular trend, he said, has been a return to fundamental tangible assets. The expert highlights the mining sector and renewable energy as promising avenues for diversification.
Specialized teams have begun to assess AI as a distinct risk and return factor—alongside price momentum, valuation, or growth potential. This approach makes it possible to accurately measure a portfolio’s exposure to the AI sector and deliberately reduce its sensitivity to fluctuations in that sector, explains Daniel Gamba, co-president of Franklin Templeton.
In addition, demand is growing for systematic hedge funds and factor diversification that take AI risks into account—the expert points to the expansion of his firm’s own systematic product line as further evidence of this trend. According to Gamby, he maintains a positive outlook on the U.S. stock market, although his assessments have become more cautious compared to the beginning of the year. Under current conditions, analysts are trying to avoid heavy concentration in a few giants that are spending about $1 trillion on AI infrastructure, and are opting for more balanced investments.
Franklin Templeton also views Japan and a number of emerging markets positively. In the fixed-income segment, the company is focusing on bonds with shorter maturities and “does not, in fact, take on significant interest rate risk at the long end [of the yield curve], except when investors are seeking yield.”
“I would say, just be careful about the risks associated with your factor diversification and try not to be too dependent on AI alone in your companies,” said Gamba. “Be a little more conservative [when it comes to portfolio protection],” he added, though he emphasized: “We don’t think anything inevitable is going to happen that could trigger a major sell-off.”
Nevertheless, citing a well-known quote from former Citigroup CEO Chuck Prince on the eve of the 2007 crisis, Mortier warned: “Today we find ourselves in a similar situation: the music is playing, and people are still dancing. But at some point, the music will stop.” Because the timing of this turnaround is unpredictable, diversification is necessary right now, the expert emphasizes.
This article was AI-translated and verified by a human editor
