One week / one topic: Spin cycle

What happened?

If you feel like you’ve been blindfolded and trapped inside a washing machine during its spin cycle, you are not alone.

There are at least three major ongoing developments to keep us all confused:

• AI is breaking old moats and amplifying dispersion

• Capital is rotating globally toward asset-heavy regions and real assets

• Policy uncertainty is a persistent drag that reshapes risk premia (and now, Iran)

Unsurprisingly, equity markets have responded and we can observe a spike in the dispersion of returns.

Funny enough, I think it all makes sense.

As AI challenges intangible moats and tariffs noise injects persistent policy friction, global capital rotates towards asset-heavy regions and sectors that can (in theory) better absorb disruption. Namely, more cyclical and asset-heavy companies.

As a telltale sign of how much the market is focused on this theme, consider how, on Monday, an independent research essay went viral and caused a major sell-off in stocks described as vulnerable to AI disruption.

Meanwhile, a number of equity regions and sectors are allegedly sitting pretty on the other side of this divide.

To take just two examples, Materials stocks had their best start of the year since 2006, while Korean equities are up (another) 56% this year alone.

What to do then, amid all the sound and fury of this great dispersion of returns?

Our observations

• Fundamentals: As previously mentioned, relative preferences within equities can drive the performance of multi asset portfolios at least as much as (or more than) the traditional ‘stocks vs bonds’ question.

• Price action: If dispersion is currently the name of the game, position size then deserves even more attention than usual.

• Investor beliefs: Radical innovation and how governments respond can increasingly be a driver of returns. Nonetheless, there is a real risk of overreacting to the latest headlines and getting whipsawed – like during the trade wars of Trump 1.0.

So what?

Facing this opportunity set, we must remind ourselves that the ultimate outcome of AI disruption is inherently unpredictable.

Investors have been mostly focusing on the ‘AI doom’ scenario which would involve massive job displacement, a collapse in demand and a self-reinforcing economic downturn.

Beyond the opposite ‘global intelligence boom’ plot line, however there are also likely to be more nuanced – but potentially very consequential – considerations about the response from governments in terms of targeted regulation and taxation.

As we can’t possibly convince ourselves that we have an edge in predicting what’s going to happen with all this, we would rather focus our attention elsewhere.

Enter Indonesian equities.

Not only – as per the above – local shares have displayed low correlation to the wider emerging markets complex.

Recently, they have also sharply repriced lower due to technical factors (a MSCI announcement triggered rules-based sales from passive investment vehicles) as opposed to any change in fundamentals.

Additionally, Indonesian stocks now trade at relatively attractive valuations – which is something of a rarity these days.

We have therefore opened a position in Indonesian equities given the attractive combination of ‘technical sell-off’ and ‘cheap enough to own while waiting for a re-rating’.

While the allocation is modest and nowhere near deterministic for portfolio-level outcomes, it has nonetheless the potential to visibly contribute over time.

(The information provided should not be considered a recommendation to purchase or sell any particular security.)

Mood music: Video Killed The Radio Star – The Buggles

By popular demand, here is the One week / One topic playlist