Amid significant volatility in the artificial intelligence (AI) sector, investors are increasingly seeking alternatives for diversification. UBS has compiled a list of 40 buy-rated stocks, highlighting 10 ‘quality defensive’ names such as McDonald’s, PepsiCo, Charles Schwab, and Thomson Reuters. These companies are noted for their resilient fundamentals and attractive valuations, offering a strategic pivot away from the dominant AI theme and towards a defensive posture against potential market downturns.
For investors aiming to reduce or avoid exposure to the highly volatile artificial intelligence (AI) trade, viable alternatives are emerging in the market. Analysts and investors are increasingly looking for neglected value opportunities and adopting defensive strategies in anticipation of a potential market downturn. Dan Alpert, managing partner of Westwood Capital, noted to CNBC, "I'm active personally in my trading portfolio in buying protection, and it's cheap... It's ridiculously cheap. It's almost too cheap, because the consensus is so far tipped to one direction."
The AI sector has recently experienced a significant pullback. Over the past month, the Global X Data Center and Digital Infrastructure ETF (DTCR) has declined by more than 10%, the PHLX Semiconductor index (SOX) by approximately 12%, and the Roundhill memory ETF (DRAM) has lost nearly 20%.
In response to this shift, UBS has compiled a list of 40 buy-rated stocks designed to offer robust diversification away from AI. They highlighted 10 specific companies, emphasizing that "Many high-quality operators with defensive attributes have fallen out-of-favor," as Joseph Parkhill at UBS communicated to clients. He added that the underperformance of these defensive stocks often occurred despite resilient fundamentals, leading to significant valuation de-rating.
Many of the stocks featured by UBS belong to traditional value sectors that typically perform well during market corrections. These include consumer staples giants like McDonald's and PepsiCo, as well as financial powerhouses such as brokerage Charles Schwab and financial information provider S&P Global. The list also includes software firms like Thomson Reuters and SS&C Technologies, both recognized by analysts for their strong fundamentals. Thomson Reuters has seen a gain of over 20% in the last month, while SS&C is up nearly 3%.
The strategy for defensive positioning extends beyond just equities. Alpert of Westwood Capital also pointed to the attractiveness of the 2-year Treasury note, stating, "You know what else is really cheap? The 2-year. If you believe that the 2-year is tied completely to the policy rate, and the policy rate is not going to go up but probably be cut, and even if it stays stable, you win, because the protection is so cheap."
