Weekly Update – Rotation, not retreat

For AI infrastructure spending, state and local results of the mid-term elections may matter more than the national outcome. Voters showed widespread opposition to data-centre development, while incoming Democratic governors in Texas, Ohio and Georgia campaigned for pauses or tighter conditions - concerns they will need to balance against investment and jobs in their states. This need not bring construction to a halt, but it will likely make approvals slower and more costly, ultimately favouring those developers with stronger balance sheets. Slower construction could also delay orders and revenues for suppliers of chips, equipment and construction services, making earnings expectations harder to meet and adding a permitting risk to the financing concerns we covered last week.

Nonetheless, the broader economic picture was firmer than the market falls might suggest. US unemployment fell in October, complicating the case for lower interest rates. A divided US government may limit the scope for major new tax and spending measures, but the US Federal Reserve’s approach to monetary policy will continue to depend on the economic data. Furthermore, Democratic control of the Senate will provide a check on future Fed appointments, potentially reducing concerns about political interference.

The following table shows the strongest and weakest returns among the underlying holdings across the T. Bailey funds of funds over the week:

AI and cybersecurity funds were among the hardest hit holdings, alongside Asian equity strategies. Our exposure to the latter includes chip and memory suppliers whose prospects are tied to US technology spending. The strongest holdings included gold (held in the multi-asset funds) alongside insurance, utilities and value strategies, illustrating a range of opportunities beyond the AI theme.

That said, we continue to consider AI an important driver of long-term economic growth. But that does not make every part of the investment chain equally attractive. Demand can keep growing while projects take longer, costs rise and suppliers fall short of investors’ expectations. In our Global Thematic Equity Fund, we remain selective about how we access that growth. In our Multi-Asset Growth and Multi-Asset Dynamic funds, we also consider how much AI-related risk to take alongside opportunities in other asset classes. Across all three T. Bailey funds of funds, we remain willing to invest in AI’s long-term potential, but not on the assumption that every ambitious spending plan will translate into profitable growth.