Opportunity in Volatility

GQG argues that the post-election selloff in AI-related equities and semiconductors is a technical dislocation that may improve the long-term setup for investors.

• The November 5 decline followed fears that a Democratic sweep could restrict data-center construction, especially in Texas, although Governor-elect Gina Hinojosa said economic development and protections for Texans could coexist.
• GQG’s base case assumes compute capacity will come online more slowly than expected, which should support the prices and pricing power of companies with operational capacity.
• The CBOE Volatility Index rose by nearly 70% in one day on November 5, one of its largest moves since inception in 1990, while semiconductors suffered their second-largest daily decline in 20 years, a six-standard-deviation event.
• The S&P 500 Information Technology Sector’s relative 12-month forward P/E fell near levels last seen in late December 2018 and early January 2019, when markets later rebounded after positioning and valuations reset.
• Since 1950, the S&P 500 has been higher 12 months after every US midterm election, although returns were uneven and the historical pattern does not remove current risks.

Takeaway: GQG sees supportive earnings revisions, cleaner positioning and lower relative valuations as reasons to look through the volatility, while monitoring capital access, compute supply and demand growth.