Market Round-up
Sector rotation dominated the markets in February, as capital migrated from the services sectors to those businesses with physical assets. The Magnificent 7 declined, with mounting concerns for the returns on investment in AI datacentres. At the same time (remarkably), fears of AI disruption have severely impacted software and information services companies. Maybe the market is now putting both groups in the ‘too hard’ column? Investors have increasingly sought safe havens in cyclical and defensive sectors where the risk of disruption is low.
Consumer goods franchises have shown remarkable resilience, despite weak US consumer confidence and slower earnings growth than the ‘disrupted’ companies.
The roaming threat of AI revolution has terrorised subsectors, regardless of the many difficulties that must be overcome before the incumbents can be challenged. Business logic must be specified, regulatory hurdles overcome, and customer trust established. In our opinion, the market has leapt from cheaper code generation to full disruption without justification. This also overlooks an critical distinction between simple tools and proprietary data assets that simply cannot be replicated by AI.
Recent results from London Stock Exchange Group (LSEG) underline this point: LSEG’s strength lies in the depth, accuracy and embedded nature of its datasets across trading, risk and compliance workflows. As AI adoption accelerates, access to trusted, structured data becomes more valuable, not less. February’s rotation reflects changing sentiment; but underlying economics of high-quality data franchises remain intact.
AI Adoption Fears Addressed
Q: Why have software and information services stocks been volatile?
A: As AI adoption accelerates, investors have become concerned that AI will lower barriers to entry and disrupt software and information services companies. This long-term fear is difficult to dispel, and the excellent results have been punctuated by sensationalised AI developments.
Q: Where does the true value of these companies lie?
A: The true value lies not in computer coding, but in unique, irreplaceable data assets that are becoming ever more critical in a world dominated by large language models. These long-term structural advantages still support the value of these software and information services businesses.
Q Why can’t large language models (LLMs) replicate these data sets?
A: These datasets are often proprietary and not available to LLMs. Much of the data is contributory, collected from customers as part of the service offering, is highly sensitive and has legal restriction over how it can be used. Other data is behavioural, generated from millions of interactions with clients over a longer period. Critically, these datasets are appended with the interpretations of experts and set in context. This is the critical process that transforms data into information that adds value to clients and can command premium value even as technology evolves.
Q: What market trend from 2025 has extended into 2026?
A: A flight to safety away from software, media, and information services towards the perceived safe havens of banks, utilities, energy, healthcare, and capital goods companies. Despite short-term shifts, we expect a natural rotation back into these sectors as the continued strong long-term fundamentals force a re-rating.
Q: What can current valuations tell us about data assets?
A: Current valuations assume rapid erosion of the pricing power of data assets, which flies in the face of all of everything that we know about LLMs. This difference between price and intrinsic value in our view indicates a compelling opportunity for long-term investors.
Investment Views
On the homefront, Hugh and Chris M, portfolio managers on the Evenlode Income fund, analyse the polarised stock market conditions that kickstarted 2026. They also discuss an indiscriminate sell-off of some capital-light areas of the market which ignore the structural advantages of businesses such as, RELX, Experian, LSEG and Sage. They argue it is only matter of time before the market recognises the unusual and compelling valuation opportunity.
Looking further afield, Ben P and Rob Hannaford of the Evenlode Global Income fund analyse what is making markets appear ‘weird’ on both sides of the Pond. They also apply a deeper lens on the European market as it shakes off its dowdy image and begins to outperform. They also touch on how the widening of the portfolio universe is a reflection of the broadening valuation opportunity.
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