LIVE MARKETS-What's next for the AI trade? 

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WHAT'S NEXT FOR THE AI TRADE?

AI-linked stocks, especially those in the hardware and semiconductor space, have come under sharp selling pressure this week, as investors question the durability of the capex cycle.

The selloff has sent ripples through some markets, with South Korea's Kospi .KS11 and the US semiconductor index .SOX falling 14% and 8%, respectively.

Barclays believes that positioning, rather than a meaningful deterioration in fundamentals, was behind the weakness, with investors happy to take profits on any negative headlines.

So where to next for the AI trade?

"We think the AI thematic is entering a more mature phase, where valuations, funding requirements, competitive threats, regulation, and revenue visibility are coming under much greater scrutiny," write Barclays equity strategists, led by Emmanuel Cau.

"It is certainly conceivable that the best of the AI thematic trade may be behind us, and therefore we think investors should be far more selective."

Their preference is to stay with companies with proven business models, strong cash flows and/or healthy balance sheets, visible revenue streams and reasonable valuations.

For Europe, worries about the AI buildout are less of an issue, which Barclays believes makes the region a good diversifier in global portfolios.

"If the AI thematic unwinds further, markets and sectors less exposed to the theme could offer some relative protection," they add.

(Samuel Indyk)

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