Britain’s old-economy giants are the City’s new favourite trade

Questor, The Telegraph’s investing column, takes a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.

Financial markets love a strong narrative – especially if it comes with a catchy acronym that makes it easy to flog.

Who could forget the Brics (Brazil, Russia, India and China), or the Mints (Mexico, Indonesia, Nigeria and Turkey), or the Faangs (Facebook, Amazon, Apple, Netflix and Google) – which then briefly turned into Maanam (Meta Platforms, Alphabet, Apple, Netflix, Amazon and Microsoft) before it arrived at today’s Magnificent Seven as Tesla and Nvidia joined that list and Netflix dropped out?

All proved to be high-octane concepts that helped drive portfolio performance – at least until they didn’t, and analysts and investors moved on to the next moniker.

And the next catchy name may be making its debut, judging by how it is cropping up with ever greater regularity in investment banks’ strategy research.

Meet Halo.

The acronym stands for Heavy Assets, Low Obsolescence. In some strategists’ eyes, it may be manna from heaven for investors who are seeking portfolio protection from any disruption caused by AI, and the threat it offers to many companies’ established business models.

The Halo thesis could also, if it proves its worth, cast a little more positive light on the UK stock market.

Last week we looked at how share prices had plunged across a range of sectors but particularly data analytics and software, amid worries about the degree to which AI could disrupt their business models.

Investors have started to question their assumptions of just how visible and reliable these companies’ long-term profits and cash flows may be.

AI, so the theory goes, commoditises coding and makes replacing legacy systems easier, so that it is easy for buyers to switch from current suppliers to cheaper versions, employ fewer staff and thus buy cheaper licences or fewer seats for users under the subscription Software-as-a-Service (SaaS) model.

To reflect this uncertainty, they have started to apply lower valuation multiples and de-rate the stocks accordingly, as they ponder what the endgame may be.

At the same time, strategists and money managers have begun to look for alternative investments, which may offer the visibility markets crave and some – any – form of protection from the challenge posed by AI.

This is where the Halo trade comes in.

The idea is simple. There are many companies whose business models rely on hard assets, such as mines, oil rigs, infrastructure and complex, engineered networks. These may be less at risk from AI, since the assets are tangible, expensive and time-consuming to replace.

They often come with a further barrier to entry in the form of regulatory scrutiny to ensure they are safe for staff, customers or both.

The Halo theory thus shines a more favourable light on miners, oils, utilities and telecoms plays, as well as heavy-duty manufacturers in industries such as paper and pulp, or engineering. Even airlines are joining the blessed group.

All of these companies carry substantial tangible fixed assets on their balance sheets, and often must fund heavy capital expenditure requirements, as they maintain and upgrade their equipment.

They must spend to preserve and improve their competitive position in their chosen industry, but the rate of change as a result of technological threat could now be lower for these industries than digital ones.

For less-experienced investors, this is a bewildering change in outlook compared with the past 15 or 20 years.

Since the conclusion of the global financial crisis, equity investors have shunned capital-intensive businesses in favour of asset-light ones, and shied away from capital investment and physical engineering in favour of share buybacks and financial engineering. AI may be one catalyst for this change, but the macroeconomic backdrop is another.

Low inflation, low growth and low interest rates have dominated since 2009, an ideal environment for assets that offered secular growth and reliable cash flow, such as technology companies and long-dated bonds. Now we have higher inflation, higher (nominal) growth and higher interest rates, or at least more volatility on all three counts.

The picture is so different that it seems logical to expect different assets and stocks to perform best, especially as what did well in the 2010s is now much more expensive, both in absolute and relative terms. The winners of the previous decade now look pricey compared to commodities, “value” stocks, cyclical sectors and emerging markets.

Nor should it be forgotten that the UK stock market, and FTSE 100 index in particular, have long been derided for a lack of technology and software stocks in favour of much greater exposure to supposedly legacy industries, such as miners, oils and engineers.

The UK may be on the cusp of something special.