From the studio

Video: Investors Club | US equity positioning and the Australian dollar (9 mins)
Video: The AI Show | US tech earnings and positioning (4 mins)
Video: CIO's Jeff Harwood on opportunities in US financials (6 mins)

Thought of the day

US equities fell on Monday due to uncertainty over US President Donald Trump’s next tariff decisions and concerns about the disruptive power of AI. The S&P 500 Index slid 1% on 23 February, while the technology-dominated Nasdaq Composite Index dropped 1.1%. Some stocks in both indices posted deeper losses between 6% and 13%.

President Trump on Monday warned countries against backing away from recently negotiated trade deals with the US, saying that he would impose much higher duties under different trade laws if they did. He added that he may also levy new license fees on trading partners, although he did not provide further details.

On trade, we maintain our view that the overall effective US tariff rate should decline to 10-15% this year, as Trump’s tariff authority is more constrained, and that lower tariff rate should improve US household spending power and limit inflation concerns at the margin.

Separately, some investors attributed the sell-off in US stocks in late European trading hours to a report from an independent research firm that outlined a potential scenario in which AI agents transform industries ranging from food delivery to payment processing, with a significant negative impact on employment. This added to a general unease in markets about the outlook for certain segments of the economy, while Nassim Taleb, the author of "The Black Swan," said markets should brace for escalating volatility and potential bankruptcies in the software sector.

On tech positioning, we note that the scenarios outlined are just one possible outcome in a fast-moving evolution of the AI value chain. Our recent downgrade of the broader US tech sector to Neutral reflects a more balanced risk-reward profile rather than a negative outlook. In fact, we believe the overall US equity market has room to move higher amid solid economic and earnings growth.

At the same time, we acknowledge that volatility is likely to persist in the near term as markets debate and ultimately seek to price the terminal values of companies that could be disrupted by AI, all while assessing the implications of Trump’s shifting tariff targets.

For investors, this means that ensuring their portfolios can withstand market risks is key.

Diversify equity exposure across sectors and regions. We maintain our positive outlook on US equities and see Attractive opportunities in financials, health care, utilities, consumer discretionary, and industrials. In addition to a monetary policy backdrop that has more easing in store, we believe the US economy should benefit from the One Big Beautiful Bill Act and a healthy and broadening trend of corporate profit growth.

We also continue to like European equities against an improving cyclical outlook and a favorable backdrop, favoring banks, industrials, IT, and utilities sectors. We highlight our "European Leaders" theme that includes European companies we believe are positioned to benefit from global trends—such as artificial intelligence, power and resources, and longevity—and Europe’s ambitious structural reforms.

In Asia, Japan and China offer compelling opportunities for diversification, in our view. We believe Japanese stocks are well positioned to benefit from a supportive policy environment, a recovery in the global manufacturing cycle, and ongoing corporate governance reforms, while Chinese equities should draw further investor interest amid AI advances and the ongoing reallocation of household wealth.

Consider structured investments with capital preservation features. Substituting a portion of direct equity exposure with capital preservation strategies can help investors, especially risk-averse ones whose portfolio share of stocks lies below long-term goals, to capture most of any potential equity rally while limiting potential losses. Typically, these instruments combine a zero-coupon bond—which returns the investor’s initial capital at maturity—with call options that provide exposure to potential gains in the underlying asset. Given their flexibility, which allows investors to tailor the degree of capital preservation and participation in rising markets, we believe such approaches can make portfolios more resilient to volatility. However, investing in capital preservation strategies requires careful consideration of several risk factors, including maturity and liquidity.

Ensure sufficient allocations to quality bonds and alternatives. Strategic asset allocation is the most effective long-term defense against market risk, in our view. Adequate exposure to fixed income and alternatives such as hedge funds can help reduce portfolio volatility and limit the impact of shocks, as bonds tend to rally during periods of lower growth, while alternatives with low correlation to equities may add stability. Investors should assess their ability and willingness to manage risks related to alternative investments.

Overall, we believe that a well-diversified portfolio, with judicious use of structured strategies, can help investors withstand volatility while positioning for future gains. Those with an affinity for gold can also consider up to a mid-single-digit allocation as a potential bulwark against geopolitical risks.