Investment Directions: Exposures for today's markets

*Diversification
Diversification and asset allocation may not fully protect you from market risk.

Artificial Intelligence (AI) remains a powerful investment theme and an important driver of markets. But growing AI-related concentration across US equities, Emerging Markets (EM) and even euro investment-grade (IG) credit means investors may have meaningful AI exposure in less obvious parts of their portfolios. We think this makes it increasingly important for clients to understand where their AI exposures sit across asset classes.

Rather than stepping away from AI altogether, however, we favour managing concentration risk* while looking in, around and beyond AI as the opportunity set across the theme broadens.

In AI: how can investors stay invested in AI while managing concentration risk?

We maintain conviction in the core of the AI theme as a return opportunity, especially amid an improvement in valuations. We favour a selective approach to AI, as broad technology exposure has become a less precise way of expressing conviction in the theme.

At its peak, dispersion within the US technology sector reached approximately 71% between the best- and worst-performing level-two subsectors.¹ Stock-level volatility has also widened dispersion between sectors and AI winners and losers.

This strengthens the case for being more selective about where investors access AI opportunities. Active strategies can help investors navigate the evolving AI ecosystem dynamically, identifying the companies, sectors and parts of the value chain best positioned to benefit as leadership shifts.

Around AI: how can investors access AI related opportunities beyond technology stocks?

Investor demand for AI-adjacent opportunities is broadening.

AI investment is creating opportunities across the physical assets and resources needed to support its growth. We see European infrastructure as a key beneficiary of a multi-year investment cycle focused on modernising critical assets, expanding electrification and strengthening competitiveness and energy security. 

More broadly, power is emerging as a critical constraint on the global AI buildout, converging with energy-security and supply chain pressures. With this backdrop, we remain constructive on nuclear as a source of low-carbon baseload power, with multiple companies reporting strong earnings and order-book growth. Improving policy support and a growing global development pipeline reinforce the investment case. 

Commodities have been in focus amid this year’s geopolitical and climate backdrop, and their role at the intersection of AI infrastructure, energy security and the energy transition. Diversified commodities today serve both a macro and portfolio role: providing differentiated exposure to the AI ecosystem and energy in the event of a rise in geopolitical tensions.

Finally, AI is opening up a compelling new return opportunity set in healthcare, expanding the investable opportunity as advances in drug discovery and development improve R&D productivity. We also see healthcare as an attractive portfolio diversifier: a beneficiary of AI adoption, but with return drivers that are less correlated with the core tech-led AI theme.

Beyond AI: how can investors broaden equity exposure beyond the AI theme?

To avoid unintentionally increasing AI exposure through active large cap US equity strategies, we favour flexible active strategies that deliver alpha with very low correlation to the broad market and the AI theme. These strategies can potentially take advantage of the broadening opportunity set, add a different return stream to the portfolio and avoid over-concentration in AI large caps.

Beyond the US, we look to Japan, where corporate reform is translating into improved capital efficiency and shareholder returns, while large-cap valuations have become more attractive³. At the same time, correlations with AI precision strategies remain low, reinforcing the diversification case.

Emerging markets continue to offer selective opportunities, with India standing out for its resilient earnings growth and improved valuations.³

More broadly, dispersion across EMs also strengthens the case for active management. High conviction, anti-momentum active strategies able to express both long and short views can capture these differences while accessing contrarian opportunities where fundamentals warrant.

*Risk Management/ Downside management, protection or mitigation
Risk management cannot fully eliminate the risk of investment loss.

As correlations shift and traditional diversifiers become less reliable, we focus on building resilience by diversifying portfolio drivers and managing market beta.

From beta to alpha: how can investors reduce portfolio risk and broaden return drivers?

Increasing correlations between asset classes mean resilience can’t be achieved by simply holding a variety of them in a portfolio.

As investors seek to diversify the drivers of portfolio outcomes – including tapping into potential return opportunities from relative moves within markets – and bring down market beta, systematic-led liquid alternatives have a role to play, in our view.

Within this space, we favour a systematic, market-neutral macro approach such as the BlackRock Tactical Opportunities Fund (‘Tac Opps’), which focuses on relative-value opportunities across countries, asset classes and regions, where dispersion can create an attractive opportunity set.*

Historical analysis showed low correlation between SDAR and broad equity and bond markets, as well as Tactical Opportunities.⁵

Managing equity beta: how can investors access differentiated alpha opportunities in equities?

With equity risk now contributing around 83% of overall portfolio risk in European portfolios⁶, we see scope to complement core market exposure with more idiosyncratic sources of return – driven by company-specific fundamentals rather than broad market direction.

Introducing alpha that’s less correlated with broad market beta – via systematic strategies or active ETF ranges – can therefore diversify portfolio return drivers.

We also favour buffer ETFs for investors seeking to remain invested in US equities while seeking to manage downside risk. By reshaping rather than reducing equity exposure, buffer strategies can retain upside participation while providing targeted protection against a level of market drawdowns.

Reshaping the equity sleeve also means looking beyond public markets: most global companies with revenues above $100m remain privately owned, expanding the opportunity set for value creation before IPO.⁷

Managing multi-asset beta: How can investors build more efficient multi-asset portfolios?

A broader mix of asset classes, with different return drivers, can help portfolios adapt as market conditions change.

Dynamic multi-asset strategies can adjust portfolio allocations as opportunities and correlations shift. Our analysis suggests that adding a global multi-asset strategy can improve portfolio efficiency by diversifying risk and contributing to returns.⁸

On the other hand, diversified multi-alternative strategies could also come in to reshape multi-asset beta. Our modelling suggests reallocating 20% of equities to multi-alternatives could improve return efficiency while keeping overall risk broadly unchanged.⁹

A higher-yield environment has reshaped the income opportunity, with more than 80% of the global fixed-income universe now yielding above 4%, compared with less than 20% on average between 2010 and 2021.¹⁰ Income has therefore returned as a meaningful standalone source of bond returns.

But not all yields offer the same compensation for the risk taken. We see a case for looking more closely at the underlying sources of portfolio income, both within and beyond traditional fixed income. Plus sectors, emerging market debt and equity income stand out as areas where we believe investors can access differentiated sources of yield and return.

Beyond traditional credit: how can investors access differentiated sources of income?

In our view an environment of attractive yields and an uncertain interest rate path favours flexibility across credit sectors and active duration management.

Flexible income strategies which can invest across corporate bonds, securitised credit, high yield and emerging market debt can complement core fixed income by enhancing yield while actively managing duration.

Securitised assets can provide another source of income. Compared to euro IG, EUR AAA CLOs offer a differentiated source of income, combining higher yields at similar or higher credit quality with structural credit protection, floating-rate exposure and limited duration risk.¹¹ Our analysis of European multi-asset portfolios suggests securitised assets remain underrepresented, accounting for just 0.5% of the average fixed-income allocation in Q2 2026.¹²

Beyond developed markets: how can investors approach the emerging market debt opportunity?

Emerging market debt (EMD) can offers attractive income alongside differentiated return drivers. Despite geopolitical uncertainty, fundamentals have remained resilient. Investor appetite for EMD ETPs has remained strong, with inflows reaching approximately $24.8B, putting 2026 on track for the strongest start to the year since 2021.¹³

Yet EMD represents just 7% of the average EMEA fixed-income portfolio, compared with 17% in the Global Aggregate, suggesting investors may have scope to broaden their fixed income exposures beyond developed markets.¹⁴

However, selectivity is key: we see LatAm standing out relative to EM Asia, supported by attractive carry and greater energy exposure, while many Asian economies are energy importers¹⁵. All the while, we continue to closely monitor Brazil’s elections and developments around El Niño for potential market impacts and idiosyncratic opportunities.

Beyond bonds: how can investors incorporate equity income into their portfolios?

Equity income can complement bonds by combining current income with participation in earnings growth and long-term capital appreciation.

Systematic approaches can also address a traditional trade-off of high-dividend investing: concentration in mature sectors that can sacrifice growth and introduce unintended style biases. By combining diversified equity exposure with dividend capture and option premia, investors can monetise volatility for additional income while retaining growth exposure.