Where should value investors hunt when the market is focused on AI? Barrow Hanley’s Cory Martin says semiconductors, industrials, and Chinese equities are all offering opportunities
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- Value emerging in overlooked sectors
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THE narrow market rally in artificial intelligence stocks is opening opportunities for investors in overlooked sectors like semiconductors, industrials, and Chinese equities, says Barrow Hanley CEO Cory Martin.
The biggest ten stocks in the US account for 37 per cent of the S&P500 index – the highest concentration in history – and have a market capitalisation equal to some two-thirds of US GDP, despite year-on-year earnings growth slowing.
Martin says the combination of the market’s narrow focus and the likely end of big tech’s earnings outperformance is creating the “perfect backdrop” for active value managers to find attractive investments.
“Value investing is a very old style of investing – and it’s actually historically been the superior way to invest,” he says.
“You’re trying to buy good companies that are down for reasons you can identify and clearly understand – and that you believe will be temporary.”
Caution on generative AI
Martin says the current hype for generative AI reminds him of the tech bubble of the 1990s.
“The companies are different … but the hype around dot com, eyeballs, clicks is exactly the same,” he explains.
“You’re seeing US$250 billion in capex next year into AI from the top three companies – that’s one fourth of their top line revenue. There has to be return on invested capital for that kind of capex spend.
“I really do question – are we going to see that in 2025? Probably not. 2026? Who knows?
“It reminds me of WorldCom in ’99 spending hundreds of billions of dollars to lay fibre optics across the Atlantic.”
Dislocated semiconductors look attractive
Economic dislocation has put semi-conductor stocks on Barrow Hanley’s radar, says Martin.
“We’re not thematic investors, but sometimes whole industry groups get dislocated,” he says.
“Right now, it’s the rest of the semiconductor chip industry. Other than Nvidia, the rest of the market is completely dislocated.”
That is creating opportunities across the industry, including for the chips used in smartphones, autos, power supply, servers, and data centres.
“Covid was such a supply chain disruption in the chip industry that capacity utilisation fell off a cliff – inventories built up, and the chip industry got clobbered.
Martin says that cycle is now near a trough.
“If they are troughing, and they start to build capacity utilisation, you’ll see a huge upswing in those chip companies.”
He singles out US-listed Microchip Technology, saying its per-share earnings of just US$1.60 this year would be closer to US$6 in a normalised cycle with inventories dropping and utilisation rates rising.
“You have to own the stock before that happens,” he says.
“You’re adding names now, not thinking about what they are going to do next quarter – everything you’re doing is setting the portfolio up to help perform in 18 to 24 months.”
Industrials’ AI tailwind
Martin says Barrow Hanley is also finding opportunities among industrial companies leveraging AI technologies to improve their operations and create new businesses, pointing to innovations at tractor maker John Deere.
“They got a division called Precision Agriculture, which will pinpoint weeds – almost like radiation treatment for cancer – and will fertilise everything. Your combine can run 24/7, without being manned. All of that is learning with AI.
“It’s happening everywhere – financial services, banking, industrial processes, manufacturing processes. Everything is going to benefit.”
China opportunities
Martin says there are also good value opportunities available in China even after the recent rally and despite the threat of US tariffs, with companies like Alibaba, JD.com, Baidu, Ping An Insurance, and Bank of China (Hong Kong) all looking attractive.
“The theme that is common around those is basically 100 per cent of their revenue comes from domestic consumers, so they’re not really subject to any industrial complex tariffs that could be imposed on them,” he continues.
“Having said all of that, the reason we didn’t go more into Hong Kong – or Chinese-companies based in Hong Kong – is because of the uncertainty with the government policy.
“We watched them beat up the tech sector, beat up the education sector and so forth.
“The other thing that we are uncertain about is the property market is still in terrible shape. The consumer is in terrible shape – and there has not been enough stimulus.
“My gut feeling is you’ll start to see stimulus, and things will start getting better.”
About Barrow Hanley
Barrow Hanley is a global leader in value investing, managing assets for clients for more than 40 years.
Barrow Hanley Global Share Fund aims to provide investors with long-term capital growth through investment in quality global shares.
Rated "Highly Recommended" by Zenith, "Highly Recommended" by Lonsec and with a Morningstar Medallist rating of "Gold", the investment team focuses on finding value in all the right places.