MSCI analysis tests diversification as AI stock sell-off deepens

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MSCI AI stock sell-off analysis

Highlights

MSCI's AI Value Chain Index shows Physical Infrastructure has fallen 22% from Sept. 30 to Nov. 6, now 30% below its June peak.
AI Value Chain Index is highly concentrated, with the U.S. accounting for nearly 80% of exposure and semiconductors, software, media, and tech hardware comprising over 70%.
Lower-correlation industry baskets rose 6% to 8% during the recent AI sell-off while the AI Value Chain Index declined 14%, providing diversification benefits over country-based allocations.

MSCI indexes highlight where AI exposure sits

As reported by MSCI, its AI Value Chain Indexes are giving investors a common yardstick to measure AI exposure across companies, industries and countries as the recent sell-off gathers pace.

The firm says the broad AI index tracks three layers of the buildout, Physical Infrastructure, Digital Infrastructure and Applications, using company exposure to 10 AI segments based mainly on AI-related revenue and partly on news attention. Physical Infrastructure, which includes chips, hardware, data centers and energy, has more than tripled since ChatGPT's release despite a 22% fall since September, and from Sept. 30 to Nov. 6 it posts the steepest drop among the three layers at 22%, leaving it 30% below its June peak.

Digital Infrastructure and Applications are proving more resilient, falling 10% and 6%, respectively. MSCI also says AI exposure is concentrated geographically, with the U.S. accounting for almost 80% of the AI Value Chain Index at the end of October, versus 64% in the MSCI ACWI IMI Index, while Taiwan and Korea carry large weights in Physical Infrastructure because of their chip and memory industries.

Industry baskets offer stronger diversification than country allocations

Sector concentration is even more pronounced, according to the analysis, with semiconductors, software and services, media and entertainment, and technology hardware making up more than 70% of the AI Value Chain Index, double their 35% weight in the broader market.

MSCI says it sorted 25 global industry groups each month into three baskets based on their expected correlation with the AI Value Chain Index. Its equity risk model indicates about half of the correlation gap between high- and low-correlation industry baskets comes from business mix, while most of the remaining difference comes from style exposures such as beta.

During the AI rally that starts in late 2022, lower-correlation industry baskets lag widely, but that pattern is shifting in the latest downturn. Through election week, those lower-correlation industries rise 6% to 8% while the AI Value Chain Index falls 14%, whereas comparable country baskets barely move.

MSCI says a simulated approach that removes AI Value Chain stocks from the MSCI ACWI IMI Index would have softened the latest leg of the sell-off, though only by taking sizeable industry bets. The firm says investors assessing portfolio resilience should first measure AI concentration, then identify the common risk drivers behind it and evaluate diversifiers alongside the additional exposures they introduce.

We have also discussed the broader context around the Nasdaq 100 drop amid AI-linked selling pressure and higher-rate concerns.

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