From the desk of the CIO: Disruption in the age of AI
Key points
- AI fears as new tools are released
- The Morningstar moat framework is still vital
- Emerging markets are showing more opportunities than developed markets
Investors continue to enjoy gains as markets move higher, with unfashionable countries and sectors outperforming and highly speculative assets like crypto falling sharply. The contrarian exposures in Morningstar portfolios have boosted client returns, with large gains in Brazil and Korea while Consumer Staples and UK equities also performed well.
What makes this year different from 2025 is how AI is impacting markets. A sell off in large AI hyperscalers has spread to software companies and more recently to highly profitable service industries. Behind the plunge are two fears about Artificial Intelligence, sparked by releases of better AI tools.
The first fear is that really big AI investments simply won’t pay off, as ever larger sums of capital are committed. Current estimates are close to $700bn just from Alphabet, Microsoft, Meta and Amazon. We do expect a sharp rise in AI related revenues from this spend, but there is considerable uncertainty and a risk that companies fail to execute.
The second fear is that AI will eliminate the competitive edge and profitability of service companies, especially highly valued oligopolies, if users can access new tools and data directly. So what should investors make of this?
Prior to this selloff, our view was that valuation levels of US technology stocks were unattractive versus most other industries and comparables outside the US, because share prices had outpaced their earnings growth. For these reasons, we held less US IT stock exposure than usual. Where we did own technology stocks, our positions were biased to hardware beneficiaries, such as Samsung and SK Hynix, whose earnings are directly linked to the increased AI spending, and firms like Google and Meta, which are using AI to enhance ad revenue generation. We also saw better value in dominant IT franchises in China.
So far in 2026 we have seen technology share prices fall while other markets rally. Could this now be a buying opportunity? For us, the real question is whether AI spend and its impact on competition will lead to much lower or less certain profitability and a lower “fair value”.
To answer that question we use the Morningstar moat framework to assess how AI might impact businesses. The moat concept popularised by Warren Buffett applies the idea that firms can erect competitive barriers that enhance profitability and growth by making it much harder for others to take their clients. Companies with “wide moats” are worth more than those with “narrow” or “no moats”. Morningstar Equity Research analysts base their moat ratings on 5 factors: Switching Costs; Network Effects; Intangible Assets; Cost Advantages; and Efficient Scale. Overall the broader sell-off looks overdone for companies with strong competitive advantages.
There is more of a question about the growing AI spend, its scope to push up costs and how revenues can rise enough whether by raising prices, taking market share or creating new markets. Faced with this uncertainty, we still favour other opportunities given current share prices.
For example, emerging market equities and bonds still offer better risk adjusted potential returns than developed countries, with the exception of the UK. Many emerging market countries no longer look like poorly managed, heavily indebted and politically volatile versions of developed countries. Instead, they have demonstrated greater fiscal discipline in terms of deficits and balance sheets. Their central banks have done a better job in containing inflationary pressures. Policymaking has been more predictable and transparent than the US, in many cases. There remain unique risks but at today’s prices investors are well compensated. Meanwhile global investors have large US asset exposures and are actively seeking to diversify into other sectors, currencies and geographies.
Disruption is certainly real and it includes not just the impact of AI. It also extends to re-examining the difference between emerging and developed countries and how much to hold in portfolios. We remain overweight in emerging market assets.
Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.
