Anton Kryachok

Investors focus on the artificial intelligence (AI) investment boom may be overlooking some of the world’s highest-quality companies, according to Anton Kryachok, portfolio manager for the International Equity team at Morgan Stanley Investment Management, who sees today’s market as a compelling opportunity for quality investing.

While global share markets have surged on the back of enthusiasm for AI infrastructure, semiconductors and digital transformation, market returns have become increasingly concentrated, creating what Kryachok describes as a growing disconnect between sentiment and fundamentals.

With less than 25 per cent of stocks currently outperforming the S&P 500 as of 31 May 2026, a small group of AI-related companies now account for an increasingly significant share of market performance.

“We’ve seen an extraordinary concentration of market returns over the past year, driven largely by a small number of companies benefiting from the AI infrastructure build-out,” said Kryachok.

“While those businesses have delivered exceptional performance, there are now entire pockets of high-quality companies trading at valuations we would not have expected to see.”

Kryachok says that the divergence can also be seen across the technology sector itself. Over the past 11 months (from 1 July 2025 to 31 May 2026), information technology stocks have gained more than 42 per cent, led by semiconductor companies, which have returned more than 86 per cent, and hardware businesses, which have risen more than 65 per cent.

In contrast, software and IT services companies have declined almost 10 per cent, despite many continuing to deliver resilient earnings growth and strong cash generation.

“The market has taken a broad-brush approach to AI disruption,” said Kryachok.

“Many businesses have been treated as potential losers simply because they operate in software, data or information-rich industries. Our view is that the reality is far more nuanced. Companies with proprietary data, embedded customer relationships and strong competitive advantages may actually emerge stronger as AI adoption accelerates.”

Kryachok believes this has created an increasingly attractive opportunity among high-quality businesses impacted by broader concerns about AI disruption.

Examples identified and held by MSIM’s International Equity team include globally recognised businesses across sectors such as digital platforms, enterprise software, electronic payments and advanced semiconductor manufacturing. These companies continue to benefit from strong competitive positions, embedded customer relationships and significant cash flow generation.

Other opportunities beyond the traditional technology sector include businesses operating in media and entertainment, as well as premium consumer discretionary segments, where long-term earnings potential appears underappreciated by the market, according to MSIM’s International Equity team.

“What unites these businesses isn’t the sector they operate in, but their ability to compound earnings over long periods of time,” said Kryachok.

“These are companies with strong franchises, resilient business models and durable competitive advantages that we believe position them well regardless of the economic or technological environment.”

Despite recent share price weakness across many quality businesses, Kryachok highlights that underlying earnings have remained resilient.

“Recent underperformance has largely been driven by valuation as investors reassess how advances in AI may affect the long-term prospects of software, data, and other information-rich businesses.

“As a result, many high-quality businesses are now trading at valuation levels that compare favourably with the broader market despite exhibiting stronger profitability and more resilient earnings streams.”

Kryachok said the current valuation backdrop was attractive for quality-focused investors.

“Today, investors can access a portfolio of high-quality global businesses at a discount to the broader market despite those companies generating higher returns on capital, stronger cash flows and more resilient earnings streams,” he said.

“While the timing of the next market rotation is difficult to predict, we believe owning high-quality businesses at attractive valuations remains a reliable strategy to compound wealth over the long term.”

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Anton Kryachok

Businesses are identifying and monetising artificial intelligence (AI), with significant opportunities emerging in select hyperscalers or large cloud service providers, along with IT service companies which advise businesses on how to implement Generative AI (GenAI), according to Anton Kryachok, portfolio manager for Morgan Stanley Investment Management’s International Equity team, based in London.

“We see opportunities and invest in a significant number of data-centred companies [through our Global Sustain strategy] such as credit bureaus, information service providers, exchanges and businesses with significant amounts of proprietary data. In combination with their strong pricing power, we believe these companies should be able to identify cost opportunities to monetise AI and crucially, retain the benefits,” Mr Kryachok said.

“At the start of 2025, stock market valuations remained elevated, with the MSCI World Index multiple at 19 times, even without accounting for the Magnificent Seven, and margins around record highs. US multiples looked particularly stretched with the market concentrated in a small number of perceived GenAI winners.

“In our view this indicates GenAI stocks may be nearing their pricing peaks. Investors only need to consider the impact of DeepSeek’s unexpected AI model release, which is built on a comparatively shoestring hardware budget, to see how fragile stock markets are, and how dependent US and developed market returns are on a small number of large technology companies, which have dominated gains.

“Such new technologies could have a prolonged impact as stock markets adapt to potentially cheaper ways to advance AI. This could weigh on the prices of technology shares and the Magnificent 7 in particular, led by Nvidia, which are trading at very elevated valuations,” Mr Kryachok said.

Another caution the International Equity team are monitoring relates to the significant levels of investment in AI, which may not be met with efficiency gains, thus threatening ambitious earnings expectations built into many US stocks. Already, concerns have been raised about Microsoft’s high level of investment in AI after its January results, with AI infrastructure spending at unprecedented levels in a highly competitive space.

“In Gartner’s terms, the ‘Peak of Inflated Expectations’ may be followed by the ‘Trough of Disillusionment’,” Mr Kyrachock said.

At a time when markets are mesmerised by US AI exceptionalism, Mr Kryachok said it’s useful to take an active management approach and look beyond to the digital transformation taking hold across industries.

“Whether we’re evaluating a leading technology company, or a leader in any other sector, our approach is grounded in identifying the high quality fundamentals that drive long-term compounding. Once we believe the quality foundations are in place, we dive deeper – assessing the strength of the franchise and the ability of the management team.

“By staying selective and engaged, we look to ensure we’re investing in high quality businesses that are not simply keeping up with the current times but leading the way into the future,” he said.

According to Mr Kryachok, the US stock market and global stocks may also be weighed down by policy uncertainty in the US. “The impacts of impending tariffs and potential deregulation are not yet known, not to mention the potential second order effects from inflation.

“Even if market strength continues in 2025, which it may despite the high level of uncertainty, we believe our portfolio of global shares in the Morgan Stanley Global Sustain Strategy looks well placed in both a relative and absolute sense, even in the absence of a downturn,” he said.

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