‘AI Not a Bubble, Diversify into Defence’

Author: Michele Morganti, senior equity strategist at Generali AM (part of Generali Investments ecosystem)

In the dynamic landscape of equity markets, strategic decision-making is crucial for investors to navigate through evolving trends and potential risks. Michele Morganti, senior equity strategist at Generali AM, offers insights into current market conditions and suggests a tactical approach to equity investments.

Assessing Market Dynamics

Morganti observes that markets are reflecting improved macroeconomic data and benefiting from favorable financial conditions. The Cash Flow-Capex spread and robust Tech earnings momentum contribute to a positive medium-term outlook for equities. However, he cautions that despite these optimistic factors, short-term setbacks remain a possibility, leading Generali AM to maintain a neutral stance.

In Europe, the strategy tilts towards cyclical laggards and undervalued sectors. While higher global Purchasing Managers' Index (PMI) readings support cyclical earnings momentum, some sectors appear overcrowded and overvalued, potentially anticipating an activity upturn. The overall stance remains neutral between cyclical and defensive sectors.

Focus on AI and Diversification

Morganti highlights the outperformance of AI stocks driven by strong earnings momentum. While acknowledging the concentration risk, he reassures investors that the current scenario is far from the dotcom bubble levels. Comparing to the peak of the tech sector in 2000, AI stocks today trade at a more reasonable valuation, mitigating concerns of a bubble. However, he warns that markets may have already priced in robust growth, potentially pressuring AI companies that fail to deliver.

Beyond AI, Morganti raises concerns about antitrust and geopolitical risks, including the possibility of new tariffs or import/export restrictions, particularly concerning China, which could adversely impact earnings growth.

In light of these concerns, Morganti suggests a diversification path into Aerospace & Defence. Generali AM holds a positive outlook for this sector, citing the ongoing recovery in commercial aerospace coupled with increased defence spending in NATO countries. This diversification strategy offers investors an opportunity to hedge against potential risks while capitalizing on growth prospects in a resilient sector.

Conclusion

Michele Morganti's strategic insights provide investors with a nuanced perspective on equity investments. While maintaining a neutral stance on equities overall, he advises vigilance regarding potential short-term setbacks and emphasizes the importance of diversification. The recommendation to explore opportunities in Aerospace & Defence underscores Generali AM's commitment to prudent risk management and seizing growth potential across various sectors.