Global equity markets continued to benefit from resilient corporate earnings and ongoing economic growth through October, although investor sentiment became more cautious toward month-end. Concerns surrounding elevated technology valuations and the scale of artificial intelligence investment contributed to increased market volatility, with the tech-heavy Nasdaq Composite declining 5.3%. As of October 30th, the S&P 500 returned 13.8%, the S&P/TSX 14.4%, the MSCI ACWI 13.2%, the MSCI EAFE 11.5%, and the MSCI Emerging Markets 15.5%, year-to-date in Canadian dollars.

The AI Buildout and Market Volatility

Semiconductor stocks were at the centre of October’s volatility. The Philadelphia Semiconductor Index fell for eight consecutive sessions through October 16th, losing roughly 16% in its longest losing streak since 2008.The index remained volatile through month-end, and fell 7.2% on October 30th after weak results from Intel and Amazon renewed concerns about AI monetization and capital spending. Several factors converged: concerns about higher interest rates weighed on richly valued growth stocks and raised the cost of financing data centre construction, sector valuations had run well ahead of earnings after a strong first half, and investors became more sceptical of how the buildout will be funded.

The selloff brings into sharper focus the question we have been examining for some time: which participants in the AI buildout are most likely to earn durable returns, and which may ultimately absorb much of the cost without a proportionate improvement in earnings. The financing picture differs meaningfully across the major spenders. Some of the largest platform companies are funding their investment largely from operating cash flow, while others, such as Oracle, are already running negative free cash flow and relying on external capital. As spending has risen faster than operating cash flow, investors have become more focused on financing needs, the length of payback periods, and whether incremental AI revenue will arrive quickly enough to support current valuations. Companies supplying chips, data centre equipment, and related infrastructure are more exposed to changes in customer spending plans, while the largest platform owners may be better positioned to capture value within their own ecosystems, although the eventual distribution of returns remains uncertain.

Our approach to these questions is consistent with how we invest across all sectors. We rely on fundamental, bottom-up research to identify businesses with strong competitive advantages, sustainable earnings, and valuations that offer a margin of safety. We also avoid momentum-driven stocks priced for optimistic outcomes. In the technology space, this leads us to favour established businesses with large user bases, proprietary data, and the financial capacity to fund investment through their own operations. Dominant platforms with broad distribution are better positioned to internalize the returns from AI investment, while established software companies with high switching costs and mission-critical workflows may be able to adapt to and benefit from AI rather than be displaced by it.

A Volatile Month for Emerging Market Equities

Within emerging markets, Brazil was the most significant source of volatility in October. In a result that defied many polling forecasts and reversed the first-round vote, incumbent president Luiz Inacio Lula da Silva, known as Lula, was narrowly re-elected in the October 25th runoff. The Ibovespa fell nearly 14% in local terms the following day and the Brazilian real tumbled 8% against the U.S. dollar. Despite the drawdown, the index remains in positive territory in year-to-date terms after a significant pre-election runup. In our view, post-election volatility largely reflects unwinding political trades rather than a material change in economic fundamentals.

Brazil’s public finances have long been characterized by wide budget deficits and elevated debt levels – key factors behind the country’s sticky inflation and high real interest rates. While Lula’s surprise comeback reignited fiscal concerns among investors, we note that stronger opposition in congress should help contain fiscal policy risks. Going forward, a credible plan for fiscal consolidation could help restore market confidence.

We do not expect a significant negative impact on earnings across our major Brazilian holdings. Many of them, including our regulated utilities, can pass higher inflation and interest rates through to customers. Our Brazilian investments have also continued to grow earnings in recent years, while paying dividends that provide a buffer. Meanwhile, expenditure-led improvements on the fiscal front could create the conditions for real interest rates to fall. This would benefit Brazilian equities as capital reallocates from fixed income. Conversely, asset prices and the BRL could remain volatile in the absence of fiscal tightening. Economic appointments and target announcements will be key signals in the coming months.

Concluding Thoughts

Periods of heightened volatility, whether driven by shifting sentiment toward artificial intelligence or political outcomes in emerging markets, underscore the importance of anchoring our process in proprietary fundamental research and looking past market noise. We remain focused on owning durable businesses at reasonable valuations, and on managing well-diversified portfolios positioned to deliver value across market cycles.

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