October saw an acceleration of the swings in markets between ‘AI’ and ‘not-AI’ companies that we noted last month, this time in favour of the large part of the equity market by number that are not directly related to the AI buildout. We have seen the flitting between AI on and off modes through the second half of the year so far, but the moves during the month were more extreme. The Information Technology subsector of the MSCI World index fell -7.7% in sterling terms, whilst holdings within the sector in the portfolio rose by +12.4%. Businesses that had been marked down as losers from the new technology saw a big upward reversal, exemplified by consultancy and outsourcer Accenture within the portfolio which rose some +40.6%.

It was not just ‘AI losers’ that found favour though. The broad swathe of the market by number that rose in value is indicative that it is flows around the warping influence of AI infrastructure investment that is driving things. Consumer goods firms, healthcare companies, business services providers and non-bank financials suddenly found themselves in favour. Having been allocating capital to these areas as they became increasingly cheap, the reversal is welcome and is perhaps the start of a move toward the guiding star of intrinsic corporate valuation.

We think that we are in the early stages of this change in market conditions. Overall market values have not fallen by much, and such had been the strength of certain areas like semiconductors that these businesses still trade at high levels despite falling recently. The portfolio continues to look cheap on all measures, albeit not quite as extreme as the level of a month previously. Further moves at the expensive and cheap ends of the market are entirely possible, and in our view likely to narrow the valuation gap. This will not happen in a straight line however, and we equally expect further reversals as we move through the next market phase. Over time though valuations normalising could throw up interesting further opportunities for investment.