The opinions expressed here are those of the author, Helen Jewell, International CIO, Fundamental Equities, at BlackRock. This column is for educational purposes only and should not be construed as investment advice.

By Helen Jewell

LONDON, July 22 (Reuters) - The AI trade may have room to run, but as it grows more crowded, investors are looking for true diversifiers – and several options are hiding in plain sight.

Vast spending on AI over the past year has boosted corporate earnings, and companies associated with this splurge have been carried higher on a wave of enthusiasm, with AI stocks ARTY.P – as represented by an iShares ETF - doubling from June 2025 to June this year before a recent pullback. The “momentum” factor – where winning stocks keep winning – has outperformed every other factor over the past five years, gaining nearly 200%, according to BlackRock. Diversification has not been a rewarding strategy.

But that might change. The AI trade is now the most crowded it’s ever been, according to Goldman Sachs, causing many investors to ask which areas of the market are unconnected to this euphoria and could thus potentially offer an offset if the AI boom falters.

Here are three options.

First, healthcare.

Investing in a global equities index is currently not as diversified a strategy as you might expect. Based on our analysis of the past 12 months of global stock market returns, the MSCI All Country World Index .MIWD00000PUS had a correlation of 0.79 with AI stocks and 0.76 with the momentum factor, meaning the returns were closely connected.

Healthcare stocks, on the other hand, had a correlation of minus 0.06 with AI and just 0.12 with the momentum factor. In other words, there was almost no relationship between the movements in AI stocks and those of healthcare stocks over the past year.

This suggests that healthcare has served well as a diversifier. Looking forward, we expect it to maintain its traditional role as a “defensive” sector that can protect portfolios during downturns due to its history of persistently strong earnings growth. Profits continue to be boosted by long-term shifts such as demographic change as well as innovation in pharmaceuticals and medical technology.

The strength of healthcare earnings in the past three decades has usually translated into a premium for healthcare valuations versus the broader market. Yet AI's dominance in the past few years means healthcare is now trading at a 15% discount.

While healthcare overall offers earnings strength at attractive valuations, we believe it’s important to be selective within the sector. Last year, healthcare exhibited more stock-specific dispersion than any sector except technology, according to FactSet and BlackRock.

We favor companies that embrace technological change. Combining vast medical data sets with AI models, for example, could speed up both the detection and treatment of disease. And that won’t change even if the wider AI boom fades.

OLD ECONOMY, NEW CASE

Second, there’s Latin America.

Equity markets in this region have had a low correlation with AI and momentum in recent years and have largely been overlooked by investors. Latin America makes up just 0.8% of the MSCI ACWI, yet accounts for 7% of global GDP, according to BlackRock analysis. We believe that gap may close over the coming years.

Brazilian .BVSP and Mexican .MXX stocks are also trading at a discount to their historical valuations, whereas most major markets trade at a premium. Potential catalysts for a rerating include any near-term interest rate cuts, which should benefit these countries’ domestic economies, and, over the longer term, rising commodity demand driven by AI and electrification.

Finally, the UK — my home market — has a low, 0.26 correlation to AI and has proved resilient during several years of market turbulence driven by the COVID-19 pandemic, geopolitical conflict and inflationary spikes.

In fact, over the past five years, the FTSE 100 .FTSE has outperformed global stocks on a total return basis – and it has done so without much, or any, pure AI exposure.

One of the UK market’s main attributes is its exposure to “old economy” sectors that are less vulnerable to AI disruption, such as financials, materials, energy and healthcare. And – as noted with healthcare – there are reasons to think these sectors could benefit from AI, whether through cost-cutting at banks or demand for materials such as copper from AI and electrification.

One potential catalyst for UK equities to close the valuation gap with their developed market peers would be political stability, following a decade in which the country has cycled through six prime ministers. Stability may lead to greater confidence in the economy, encouraging domestic investors to join foreign investors as net buyers of UK equities.

There is an obvious risk with this diversification strategy: AI momentum could keep running while the diversifiers intended to protect portfolios continue to drag on performance. While there are reasons to be positive about the three areas above over the long term, there are few clear catalysts for near-term outperformance against AI.

But the AI trade could stall — whether due to concerns about over-investment or some unforeseen event. We’ve already seen a pullback in the U.S. semiconductor index .SOX just this month. So holding stocks to help weather the storm still seems prudent.

(The opinions expressed here are those of the author, Helen Jewell, International CIO, Fundamental Equities, at BlackRock. This column is for educational purposes only and should not be construed as investment advice.)

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