Asia and select Europe markets look attractive amid US concentration risks: David Gibson-Moore

Kshitij Anand: What do you make of the US markets? In fact, they have delivered good returns in 2025 as well at this point in time.
David Gibson Moore: Well, I think your summary was absolutely excellent. The performance of US equities in 2025 was strong and, in fact, historically quite notable. The S&P 500 returned 18%, including dividends; the Nasdaq rose about 21%; and the S&P Growth Index gained about 22%.

This was the third consecutive year of double-digit returns and was very attractive for most investors, of course. However, as we know, the leadership was highly concentrated.

A relatively small group of mega-caps — the AI-linked companies including Nvidia, Microsoft, Alphabet, and Meta, and so on — drove a disproportionate share of these index gains. This was supported by high earnings growth in that sector and increased P/E valuations.

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I personally feel it is very useful to go back to the classic valuation model. In other words, total return arises from earnings growth, number one; change in valuation multiple, number two; and dividend distribution.

When we analyse the market, it is very useful to drill down into those two factors. Dividend return is probably slightly less important in this context, but the first two factors are crucial when we try to determine whether this is sustainable and what investors should be doing in 2026.

Kshitij Anand: There was a recent survey — Bank of America usually comes out with these surveys every month — which showed that global investors are increasingly worried that companies are overinvesting. Do you think there is some merit in that statement?
David Gibson Moore: Well, yes and no. It depends, again, when we break it down into those two elements — whether P/E ratios are going to remain high for these mega-cap stocks or whether they are, in conventional investment wisdom, going to revert to the mean ultimately, perhaps even this year; and also whether earnings are going to continue growing. These, of course, are the great questions in investors’ minds.

When you extend the argument, there is also the question of whether we should be diversifying out of mega-cap stocks and whether we should be looking at certain interesting opportunities in overseas markets. I think these are themes we will probably be developing together, and they are very much on investors’ minds at the moment.

If we look at the US markets, the sustainability factor for them to remain attractive is going to depend on continued earnings growth; broader earnings participation beyond the current leadership — which is a most interesting question; tangible productivity gains from AI-related capex — are we going to see this now, or is that going to be delayed?; and, underlying all of this, the path of real interest rates, which is very important for the US market.

Kshitij Anand: One of the factors that really drove US equities higher was technology, and AI contributed significantly. AI bubbles were cited as a top tail risk. How might AI-related exuberance contribute to overinvestment concerns? What are your views on that?
David Gibson Moore: A very interesting point — and a critical one. I think it is a very good question indeed. The key factor is the vast capex we are seeing from mega-cap companies. The figures, I believe, are around $600 billion from Microsoft, Alphabet, Meta, and Amazon. These are extraordinary numbers.

When are we going to see results from this? When are we going to see earnings improve? When are we going to see cash flow coming back from these investments? These are, frankly, problematic questions and the subject of much analysis.

In fact, you can draw analogies with what happened during the dot-com boom. Investment in fibre and cabling, for instance, was extraordinarily high, and the results were not seen for quite some time. So the critical factor will be the productivity of the huge investment going into this sector.

And, of course, this is not just a US phenomenon. Globally, AI-linked investment is driving extraordinary expenditure across developed and emerging markets. We know this is also a China story — they are investing hundreds of billions in AI. So this phenomenon is not unique to the US.

Kshitij Anand: And given the mixed signals of bullish sentiment and overinvestment fears that we are seeing, what should long-term investors watch most closely in the coming months?
David Gibson Moore: Well, we have cited Bank of America several times already. I think they had a very good report that came out recently, which I was studying the other day.

In fact, based on responses from 162 managers overseeing about $140 billion in assets under management, a record 81% of respondents believe that the capex figure is simply too hot, with only 20% supporting further increases and 25% citing an AI bubble as the top tail risk for US markets. So there is a lot of concern.

Of course, the other aspect is that if we are looking at the AI phenomenon, other companies are also benefiting from it. Another factor is the extent to which companies using AI themselves are going to improve their cash flows and earnings situation.

So, if we assume that mega-cap stock P/Es have reached their limits, that could be an argument for diversifying out of the Magnificent Seven and into financial stocks, healthcare stocks, and other sectors that have been commented on quite recently.

We might see diversification away from mega-caps into other attractive stocks in the US. And, of course, the other part of the equation is what is happening overseas and whether we should be diversifying slightly out of the US.

I think this is very interesting because, as asset managers, we set up a strategic allocation — that is, the long-term allocation — but then we also have the option of tactical variations, meaning short-term adjustments to strategic allocations. I think these are probably the areas that are going to change.

The US has such a large market and such a significant technological advantage that it will always remain a key element in any portfolio.

Most optimization scenario analyses would likely put US exposure at around 55–60%, almost automatically. However, we are now considering whether tactical allocations for 2026 should be adjusted to take some of these other considerations into account.

Kshitij Anand: But apart from the US, are there any other geographies that are looking particularly attractive?
David Gibson Moore: That is a very interesting and important question. Obviously, the two main geographies that come to mind are Asia — which would include South Asia, including your own Indian economy, which we can discuss further — and Europe.

Certainly, most analysts would say that Asia looks to be in relatively good shape at the moment. It has not experienced the same level of AI-driven capex intensity, although that is still a factor.

There are some very interesting features in South Korea and Taiwan, and of course Indonesia, with its mineral resources. I think India has some wonderful features that would attract international investors.

Europe presents a slightly different mix. Its markets are not nearly as AI- and tech-oriented. There is more exposure to manufacturing, and defence is now becoming an increasingly interesting sector in Europe.

Another underlying factor, of course, is currency. For a US dollar-based investor, currency movements are critical. Japan, for example, delivered very attractive returns, and that trend seems to be continuing.

However, the dollar was quite strong last year, which reduced Japan’s attractiveness in dollar terms. With the dollar weakening somewhat recently, that is another factor that must be considered when looking at overseas investments from a dollar-based perspective.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)