Bob Homan: Give volatility time to run its course
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
Under the strong influence of the AI revolution, hope and fear are rapidly alternating on the stock market, with share prices fluctuating and differences between companies growing. How can investors weather all this AI turmoil?
The stock market has been quite volatile lately. This is mainly due to the hopes and fears surrounding AI-related shares, which now carry considerable weight in the major indices. At the same time, we are seeing a sharp increase in what we call “dispersion”: the difference in price movements between individual companies is growing. This phenomenon is also closely linked to the AI boom.
AI sets everything in motion...
In the short term, volatility is almost always about sentiment. After all, the world does not change overnight. Yet investors seem to be swinging between extremes: one day, the fear that AI investments will never pay off (or even disrupt the world) prevails, while the next day, the belief that AI will increase productivity so much that scarcity will disappear for good prevails. My advice: ignore the daily fluctuations, no matter how large, and don't take sides. Volatility – and the unrest that comes with it – is simply the price you pay for the risk premium that investing yields.
...but it's no panacea
And the truth? As is often the case, it lies somewhere in the middle. AI will undoubtedly contribute to productivity growth and profitability, but it will not be a historic turning point for financial markets. Structural factors reinforced by AI – such as labour polarisation, with jobs increasingly concentrated at the top and bottom of the wage spectrum – will temper exuberant profit growth.
Whereas in previous years there were large differences in returns between sectors, this year there are clearly fewer. However, there is enormous dispersion between stocks within the same sector. Presumed AI winners are doing well, presumed losers are doing poorly. And expectations about who will be the winner or loser change almost daily.
Diversification remains the watchword
What can you do with this information as an investor? You can avoid obvious losers. But what if you really don't know who will win or lose, as is the case with the technology giants? My conviction is that AI is currently lifting all major technology stocks. You don't want to miss out on that. Perhaps the big winners will become clearer soon, but until then, the old motto applies: diversify. And, the nice thing is, that diversification doesn't have to be that extensive, with only a handful of major players.