A chaotic start to 2025 in terms of extensive policy changes in the US and sweeping developments in tech creates urgency for investors to balance the need to capture growth while also managing risk.
To achieve this, an active, defensive equity allocation has the potential to play a meaningful role in today’s investment era. It is a particularly well-suited approach for investors with longer time horizons and the ability to tolerate short-term volatility, said Chee K Ooi, senior portfolio manager at State Street Global Advisors (SSGA).
For example, he believes the disruptive nature of AI will create few winners and possibly many losers. “[It] could lead to complacent incumbents getting dethroned by more efficient, more innovative players.”
In such an environment, the interaction between SSGA’s ‘value’ and ‘sentiment’ factors can be effective at capturing value. “Sentiment drives investment into new trends, while valuation anchors the strategy with the discipline of not over-investing in unsustainable trends,” he explained.
Further, the ‘quality’ and ‘catalysts’ factors within the firm’s investment process provide further diversification by evaluating balance sheet qualities, as well as avoiding excessive leverage.
Adapting to growing AI competition
Historical patterns in the tech sector cannot be ignored. Just as the evolution of the internet and falling bandwidth costs saw new players like Amazon, Google, Netflix and others flourish, and the circle of value creation in turn expand, the democratisation of AI will broaden value creation to many more industries outside of the big tech and chip players.
“Over the past year, we have already seen how the expansion of AI infrastructure creates new demand for energy infrastructure,” Ooi explained, pointing out the benefits for utilities companies – which represent core holdings in his portfolio.
Yet not all businesses can effectively deploy such powerful technologies and transition their workforce skills to suit.
As a result, to assess the potential ‘winners’, SSGA has expanded its ‘quality’ and ‘catalysts’ metrics to include both traditional and alternative data, to differentiate those companies that can withstand transformational change and have both the capital and culture to adapt.
“Companies with good reputations and the ability to retain and acquire new talent are more likely to succeed,” added Ooi.
He believes this requires an active approach to capture the selective value creation during the next era of explosive technological change and disruption. “The active component seeks to capture return opportunities, while the portfolio risk management component actively lowers portfolio risk through greater portfolio diversification and risk factor mitigation.”
Risk management at the forefront
Despite lingering optimism among some investors about the potential for AI and innovation to keep a stock market bull-run going, geopolitical competition might well spur prolonged trade conflicts.
“The deep impact of these highly disruptive technologies could have unintended societal and economic impacts that are hard to mitigate,” said Ooi. At the same time, drastic demographic shifts could also pose a threat to positive sentiment.
In response, he suggests the need for thoughtful management in preparation for this nascent rise in market risk. “Investors should not be overly complacent that the low-risk market set-up will be sustainable over the next decade amid the cross current of all the disruptive forces.”
