Market Musings 210226: The HALO Effect Intensifies

Market Musings 210226:
The HALO Effect Intensifies

Podcast: European Banks: further to go (click on link to listen)

European banks delivered an exceptional stock market performance in 2025, averaging +67% in EUR, far outpacing all other European and American sectors.

What are the outlook and prospects for 2026?

• European banks remain undervalued and one of our preferred sectors.

• New opportunities and efficiency gains emerge, with limited risks.

• Estimated upside potential for the European sector in 2026: +15% on average.

• US banks are also healthy, but their appreciation potential is more limited.

Rotation to HALO: Heavy Assets, Low Obsolescence

The prevailing theme in the stock market at present is the rotation away from digital assets back towards physical assets.

With investors increasingly worried about which companies and industries are at risk from disruption from Artificial Intelligence, they have instead begun to favour companies and industries where the risk of AI disruption is low to none.

Sectors such as software and even logistics have suffered from dramatic falls in stock prices following the launch of Anthropic’s Claude Code AI coding agent, which can allow much faster development of custom software applications even potentially by non-programmers, thus posing a threat to the recurrent revenue streams of Software As A System (SAAS) companies. Cybersecurity software companies have been the latest technology subsector to be caught up in these “AI disruption” fears with the recent launch of Claude Code Security, which is aimed at helping programmers detect potential security flaws in their software code during the development phase.

Since November 2025, the IGV US software ETF has fallen 30% on the back of this perceived AI threat to software companies, with even Microsoft not escaping the pressure on the sector with a 23% fall over this period.

At a broader level, the sector rotation away from former US technology market leaders and towards asset-heavy industries such as Metals & Mining and Energy has accelerated since November. The XLK US technology sector ETF has fallen 6% and the Nasdaq 100 has lost 3%. In contrast, the XLE US Energy ETF has gained 25% and the PICK Global Mining ETF has risen 32% since November.

On this same HALO rotation theme, European Building & Construction stocks continue to break out to new all-time highs. Not only are construction benefiting from a recovery in European residential house prices, but also from exposure to the growth in European defence and infrastructure spending plans led by Germany.

Within Financials, the HALO trend has favoured Banks which should benefit from AI-linked productivity gains to drive down costs, while in contrast the Insurance sector has been increasingly seen by investors as vulnerable to AI disruption. AI agents can increasingly compare insurance policies and prices and recommend the best combination of policy benefits and low prices to consumers, thus pressuring insurance company profit margins.

Ultimately, what will protect knowledge-based companies from the risk of AI disruption will be factors such as proprietary databases.

This suggests that some companies that are currently being derated due to perceived risks from AI could offer excellent entry points for the long term. This is where I am looking for quality companies trading potentially at bargain prices...

Bonne semaine

Edmund