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LOOKING TO CHINA FOR DIVERSIFICATION AMID AI, IRAN WAR RISKS

Money managers have been saying that diversification in portfolios is more important than ever, but Magdalena Ocampo at Principal Asset Management writes that diversification has become more challenging to find with the Middle East war pushing up energy prices and global artificial intelligence exposure.

While she notes that the S&P 500 has stayed resilient, Ocampo points to concentration as a worry because of technology's outsized almost 40% weight in the benchmark index which "leaves investors exposed should hyperscaler AI capex expectations soften."

And shared exposure to AI "has reduced regional differentiation" because of globally intertwined supply chains which "make regions with earnings tied to U.S. tech firms vulnerable to shifts in U.S. AI investment," Ocampo said.

Also, the strategist adds that "economies with greater exposure to the conflict have lost their appeal as portfolio diversifiers."

Against this backdrop, investors are being forced to reassess diversification efforts.

For example, she says that "Korea and Taiwan are critical U.S. tech suppliers and are therefore closely tied to the U.S. AI cycle" with their combined weight in the MSCI Emerging Markets Index .dMIEF00000PUS doubling since 2020.

And while Europe was previously viewed as a compelling place to diversify investments "due to lower tech exposure and strong domestic tailwinds, is now perceived as less attractive given its sensitivity to energy shocks."

But Ocampo does have one geographic suggestion: "China’s sustained push to reduce reliance on external trade partners for both energy and tech inputs position it as one of the few major markets offering distinct diversification attributes and greater resilience to external shocks."

(Sinéad Carew)

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