LIVE MARKETS-Look to conglomerates for AI volatility protection

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LOOK TO CONGLOMERATES FOR AI VOLATILITY PROTECTION

As concerns about AI disruption have caused investors to play "whac-a-mole" in trying to anticipate which sectors may be the next to sell off, conglomerates may be insulated enough to provide protection from the volatility.

Fears that developments in the AI space would act as more of a competitor than a partner and damage profitability have taken chunks out of various sectors, notably software .SPLRCIS, which have fallen for four straight months, declining more than 28% over that span.

But if the worries stem from a business being easy to disrupt, perhaps a company with multiple business lines might be a solid play, according to Jeff Weniger, head of equity strategy at WisdomTree in Chicago.

"Company A is a one-trick pony, one business line, that's a heads or tails situation as to whether or not it gets disrupted," Weniger said in an interview with Reuters.

"Now consider the fictitious, big, ugly industrial conglomerate... and we have 15 or 20 business lines, none of these actually make sense to be smashed together, but maybe we can disrupt a handful of these business lines and keep this corporation solvent or thriving with the rest of the business lines."

Weniger noted the S&P 500 .SPX is still near record highs, as is the S&P equal-weighted index .SPXEW, while the small-cap Russell 2000 .RUT has been outperforming large-cap indexes this year.

With stocks specifically exposed to software getting hurt, Weniger believes it makes sense to create a basket of stocks with multiple business lines and products, such as Berkshire Hathaway BRKa.N, 3M MMM.N and Disney DIS.N.

Weniger said when he ran a basket of 15 stocks he viewed as conglomerates, "There was alpha generation there by just blindly backtesting this basket, and it was a few hundred basis points north of the equal-weighted 500. So that's the first time in my career that maybe you would want to get long conglomerates."

(Chuck Mikolajczak)

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