At the top of that list might be global equity funds that invest in what are called quality stocks, such as global consumer brands, a strategy championed by the likes of Terry Smith at Fundsmith, who has had a tough few years (to put it mildly). In that category, I’d also put Nick Train’s Finsbury Growth and Income investment trust and Mark Ellis’s Nutshell Growth fund.
But what do the fund managers themselves think might be worth investment in this slow puncture scenario? Casting the net a bit wider, I asked a broad cross-section of fund managers to suggest their favoured plays in a rotation scenario. Interestingly, not many wanted to put their head above the parapet but I did receive some interesting ideas from a handful.
Healthcare was popular with fund managers. Jacques Hirsch, a portfolio manager at Carmignac, for instance, suggested medical equipment stocks.
James Wigley, of Pictet, argued that real-asset stocks within healthcare would be interesting. He said: “The outlook for senior living facilities and hospitals is driven by demographics and baby boomers are still going to reach their 80s even if AI melts down.”
Nabil Milali, a strategist at Edmond de Rothschild Asset Management, also pointed to biotech and pharmaceutical stocks, arguing that “historical precedents from the dotcom bubble in 2000 and the real estate bubble in 2008 show that when a bubble bursts, capital begins to rotate toward the next narrative”. Cue an ageing society as the next big theme.
Milali even suggested that an AI bubble burst could help some less high-profile tech names, especially those in China.
“A pull-back in US AI stocks wouldn’t necessarily signal a sell-off across the entire global tech sector, much less call into question the productivity gains that AI will ultimately deliver,” he said. “This could present an opportunity for a significant rotation. Chinese tech is trading at valuation multiples of 10-12x and has been under-owned for four years.”
In a similar vein, Richard Clode, a co-manager at leading investment trust Bankers, suggested the likes of Apple, Sony and Nintendo: “If AI demand collapses then memory pricing would collapse and that would become a major tailwind for consumer electronics.”