Equity markets have continued to reach new highs in the first half of the year, driven by strong momentum in AI-linked semiconductor, semiconductor equipment, and memory stocks. While we remain constructive on the outlook for further gains, widening performance gaps across individual stocks are increasing the risks of concentrated single-name exposure.
We see three ways investors can reduce concentration risk without stepping away from the underlying drivers of the current cycle:
Diversify single-stock exposure across regions and sectors
Investors with concentrated stock positions should consider broadening their core equity allocation across our preferred markets and sectors to reduce reliance on a small number of names. We currently favor the US, Asia ex-Japan, Japan, emerging markets, Singapore, Switzerland, and Germany, alongside sectors such as health care, industrials, and European consumer discretionary.
Add exposure with differentiated return drivers
Investors can also reduce reliance on a narrow group of stocks by adding exposure to preferred themes that broaden the sources of equity returns. We currently favor the following tactical opportunities: “European leaders,” supported by structural growth opportunities; “Luxury and lifestyles,” driven by cyclical earnings improvement; and “Automation and robotics,” where demand is recovering and AI is lowering barriers to broader adoption.
Use periods of strength to rebalance into broader equity exposure
We expect continued optimism around AI to drive periodic rallies in megacap stocks. Investors can use these rallies to rebalance some concentrated positions into multifactor strategies, which can help improve downside protection and diversify portfolios, while yield-generating structured investment strategies can broaden sources of return within an equity allocation by adding an income element.
