When disruption meets diversification
US share markets stalled last month as robust economic fundamentals collided with an increasingly complicated set of crosscurrents, including escalating tensions between the United States and Iran. Nevertheless, bonds and non-US shares delivered solid gains in February, lifting Milford Funds into positive territory.
Last month, we saw the AI story has moved on. Whilst semiconductor companies remain the key beneficiaries of this technology revolution so far, the market is now focused on companies that may be AI losers. The recent release of new AI coding tools has caused investors to question the viability of software companies of all kinds, alongside other industries that are deemed ‘disruptable’. Conversely, investors have sought to own industries that are asset heavy and deemed less ‘disruptable’. This bifurcation was reflected in our holdings performance last month. Utility companies such as SSE plc (+11%), National Grid (+12.7%), alongside energy companies such as Shell (+11.0%) did very well. But there were also notable losers in the form of Amazon (-12.2%), Google (-8.0%) and Microsoft (-8.5%). These moves also contributed to an underperformance of US shares vs other regions, benefiting our increased exposure to the UK which significantly outperformed. We are attuned to the possibility that the AI disruption may be overdone, presenting us with opportunities to add to oversold stocks.
Bonds had a good month, and this helped our lower-risk Funds to deliver good gains. Strength in bonds was largely driven by fears over AI disruption leading to increased unemployment and broad disinflation over the medium-term. This strength in bonds also came alongside a modest recovery in the US dollar, reversing some of the weakness in January. Commodities continue to rally and this helped performance of our Australian resource holdings.
Looking ahead, we continue to be encouraged by the robust fundamental backdrop and the prospect of good earnings growth. Broader global economic growth, coupled with cheaper valuations outside the US continue to present opportunities for us. AI disruption and geopolitical tensions, including ongoing instability in the Middle East, could trigger commodity price swings and short-term market volatility. Historical experience shows that market reactions to geopolitical shocks tend to quickly fade. Our reduced equity exposure and elevated cash reserves position us well to take advantage of more compelling entry points should they arise.
