Kevin Hebner

Investors need to look beyond traditional asset classes and approaches as shifts across global markets create new opportunities and challenges for portfolio construction, according to leading investment managers speaking at the GSFM Investment Symposium this month.

The Symposium brought together investment experts to examine the forces reshaping markets, from changing equity and bond correlations and valuation opportunities in Australian small and mid-caps, to the evolution of artificial intelligence, the growth potential across Asian markets and the increasing importance of infrastructure and private markets. 

AI – the one trade that matters?

The growth and potential of AI has dominated markets since 2023 but Nick Griffin, CIO at Munro Partners, said the world is still only at the start of the AI story.

“There’s a lot of talk about whether we’re in an AI bubble and our view is this is a boom, not a bubble. AI is the next big platform shift, and it’s only just beginning so we believe this is a very good time to be in investing,” he said.

“The shift to agentic AI is now taking off, and at a scale that we’ve never seen before in human history. But it’s still in its early stages – nothing grows like this at the end of its life only at the start of its life.

“Investors who are concerned about whether current valuations are sustainable or when AI companies will start delivering on their promises, should ask themselves this: Are people using a lot of AI? The answer is unequivocally yes. The next question is: are they going to use more AI? Again we believe the answer is unequivocally yes, because AI is a general purpose technology that’s applicable to every industry in the world. Currently we’re probably using less than five per cent of all the AI we are going to use in the next decade, so there is enormous upside still ahead.”

Kevin Hebner, global investment strategist at TD Epoch, agrees that AI is a long-term story but said investors should also prepare for ongoing market volatility.

“Our view is that AI is the third industrial revolution and that brings opportunities, but investors should keep in mind there will be booms and busts along the way so they need to construct resilient portfolios.

“Comparable examples from the past, such as the growth of railways, electricity, and autos, show there are multiple booms and busts during these kinds of cycle, so it’s important to create portfolios that are resilient, which means diversification – across the entire AI stack, geographies, and market cap.

 “It’s also important to de-hype portfolios. There’s a lot of hype and concentration in portfolios, for example towards tech momentum. So portfolio construction, risk management analysis, and constructing resilient portfolios, are critical and it’s more difficult than it’s ever been before,” he added.

Kristin Ceva, senior portfolio manager at Payden & Rygel, said the growth of AI is also playing out in fixed income markets around the world. 

“In fixed income markets, government issuance is expected to hold relatively flat over the next couple of years. But the area of fixed income that is really growing is AI financing which is becoming more of a credit and fixed income story. In 2027 AI financing is expected to be around $600 billion as focus shifts from being equity-led towards credit becoming a larger percentage of the overall pie,” she said.

“As this plays out, it will have implications for yields which will move higher, and credit spreads will potentially move higher as well. This makes it a longer-term positive story for savers and fixed-income investors.

“Fixed income also has an important role to play as a diversifier away from the AI trade. With the US equity market so dominated by AI assets, emerging market debt looks increasingly attractive. Many emerging markets are looking strong at the moment, having moved quickly to control inflation and supported by very resilient growth as well as improving external financing, better current-account balances and stronger foreign-reserve buffers.”

Alec Small, portfolio manager at Payden & Rygel, says the outlook for fixed income is very favourable. 

“There’s an adage in investing: do you want to eat well, or do you want to sleep well? The point being that a portfolio needs both, and bonds are the sleep-well side of it.” 

“What has changed is that investors are now being compensated properly for sleeping well, in a way they haven’t been for a number of years. Everyone wants your money right now, and when capital is scarce it has a price. That price is the yield. It’s a long way from the years after the financial crisis, when there was too much capital and not enough compelling places to put it, and lending to governments earned you very little after inflation.”

“The AI build-out needs to raise more than a trillion dollars next year, and those estimates have only moved one way in 2026: up. The hyperscalers get most of the attention, and deservedly so. They stepped up materially this year, to around $300 billion of bond issuance, and we expect that elevated pace to continue. But the incremental growth is coming from everyone else: data centres, neoclouds, the AI labs, plus new equity and IPOs. That is a lot of supply for the market to absorb, and it is one of the bigger reasons investors are being paid more to lend today.”

“And it’s not just a US story. We look at real yields, which is simply what you’re paid after inflation, and we compare each market against its own ten-year history rather than against each other. On that basis yields are elevated right across the market, in the US, in other developed markets and in emerging markets. For a stretch of the last decade, investors in some of those markets were effectively paying for the privilege of lending. That has reversed everywhere.”

Spreading risk across a portfolio

Investors may need to rethink the role of traditional portfolio diversifiers as the relationship between equities and bonds changes, and consider alternative strategies, private markets, and trend-following as increasingly important strategies.

According to Tarek Abou Zeid, head of client portfolio management at Man Group, the traditional role of bonds as a counter to equities has become less reliable, particularly in an environment where inflation remains elevated.

He highlighted that trend-following strategies are a potential source of alpha, particularly during a financial crisis. The innovation in these strategies could help address the traditional trade-off between performing well in crises and participating in markets during more benign periods.

“Investors have traditionally relied upon the 60/40 split, but they must now consider where portfolio protection and diversification will come from in the next market cycle.

“The performance of trend-following during market crises, whether the bear market in the early 2000s, the credit crisis in 2008, or COVID, shows that remaining invested, rather than attempting to time such events, allows investors to benefit as the models adapt to changing market cycles,” he added.

Marc-Andre Lewis, president and CIO of CI Global Asset Management, argued that effective portfolio construction requires an understanding of how investors are likely to behave during periods of market stress, amongst other things.

“Investors looking to private markets through evergreen fund-of-funds structures need to look beyond just selecting their underlying managers. A FOF portfolio needs to be built for investors, not just a mechanism to distribute funds.”

He also highlighted the importance of modelling the interaction between market movements, liquidity calls and distributions.

William Briggs, managing director at Ardian, said infrastructure gives investors exposure to assets that are increasingly essential to economic activity, while also providing potential protection against some of the forces driving market volatility.

 “Heathrow airport is an example of systemic infrastructure with cash-flow visibility, and inflation protection while also providing opportunities for industrial asset management and transformation.”

Valuation gaps visible as investors look beyond Australia’s mega caps

A widening valuation divide between large-cap stocks and the wider market is creating opportunities for active investors, with overlooked Australian SMID-cap companies and Asian technology emerging as opportunities for investors. 

Tim Carleton, CIO at Auscap Asset Management, said the Australian market had experienced a meaningful valuation dislocation over the last six months, with large-cap stocks becoming increasingly expensive.

“The valuation gap has emerged despite considerable difference in underlying earnings growth, creating opportunities for investors willing to look beyond the largest companies in the Australian market,” he said.

Carleton said the dynamic was evident in the retail sector, where since 2002, JB Hi-Fi has generated compound EPS growth of 11 per cent per annum compared with a decline in Woolworths’ EPS, yet Woolworths has historically traded at a premium valuation to JB Hi-Fi.

Andrew Swan, head of Asia (ex-Japan) equities at Man Group, said investors should also look beyond the established beneficiaries of the artificial intelligence boom as the technology enters a new phase.

“The AI opportunity is becoming much broader than the semiconductor companies that initially captured investors’ attention. As AI moves from training towards inference and agentic applications, the infrastructure required to support it is expanding across power, networking, cloud and applications,” he said.

Swan described Asia’s industrial production as being at a four-year high, while non-AI-related export strength has also been accelerating. Selected Asian economies account for approximately 76 per cent of the region’s exports, providing a significant opportunity set beyond the AI theme.

Qiao Ma, portfolio manager at Munro Partners, said small and mid-cap companies globally were being overlooked by investors despite the potential for significant earnings growth in areas benefiting from long-term structural trends.

“The opportunity in SMID-caps is not simply about buying cheaper companies. It is about finding businesses with the earnings growth and structural tailwinds that can allow them to grow into, and potentially beyond, the valuations the market is currently assigning them,” she said.

Qiao highlighted the aviation industry as one example of the structural opportunities emerging outside the better-known AI names, with rising travel demand meeting a constrained supply chain and shortages of aircraft, components and skilled labour.

The post GSFM Symposium: AI, risk and valuation gaps appeared first on AdviserVoice.