Benjamin Melman, global chief investment officer at the Paris-headquartered group, said it is increasing exposure to emerging market and Japanese equities.

“The US market is rebalancing, notably in favour of small-cap stocks, as it begins to penalise the heavy artificial intelligence investments by tech giants whose profitability is uncertain,” Melman said in a note last week.

“The sharp drop in the software segment is deemed disproportionate. The market is underestimating the diversity of companies in the sector and ignoring the Jevons paradox, according to which lower costs related to AI will stimulate software demand,” he continued. (The "Jevons Paradox," coined by the 19th century economist William Stanley Jevons, holds that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases rather than decreases.)

In this context, Melman is increasing his exposure to emerging market and Japanese equities. In fixed income, he likes financial bonds, emerging market debt, and corporate hybrids, focusing on short and intermediate maturities.

Emerging markets win new friends
This stance is shared by others. A number of investment managers are positive about emerging markets this year. Paris-based asset manager , for instance, which has €2.2 trillion ($2.5 trillion) in assets under management, told this news service that it is slightly overweight in equities towards Europe and emerging markets, at the expense of the US: “We are interested in emerging markets due to the growth opportunities there.”

Although US equities remain a cornerstone of investors' portfolios, also favours a reduction in investors allocation to US equities in 2026, and an increase in European and emerging market ones. See here and here.

The move towards emerging markets is sometimes explained as a way of reducing rather than raising overall risk exposure – highlighting how the area has enjoyed a change in its perceived status in recent years.

Broadening
Edmond de Rothschild AM's Melman said that since the start of this year, "broadening has taken hold in US markets." The Magnificent Seven big stocks in tech – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – have under-performed the S&P 500, which has lagged the Russell 2000 Small Cap index by a wide margin. “This marks a major turnaround in market leadership compared with previous quarters,” he added.

Melman said the AI market cycle has become more mature and less univocal. Alphabet and Amazon’s announcements of massive and higher-than-expected investment plans for 2026 were poorly received by investors – an all-time first – and failed to generate a pulling effect for the stocks meant to benefit from these plans.

“The free cash flows of many hyperscalers should be in negative territory this year, meaning that these players will have to raise debt or issue stocks to finance their investments – which is also unheard of,” Melman said. “These 'asset light' companies, a feature that supported their stock price, have gained weight. In addition, investors have started to raise questions about the profitability of these increasingly massive investments.”

However, one theme has remained constant over the past few months: the identification of AI victims.

“Software companies suffered a sharp and indiscriminate correction, losing almost 20 per cent in just a few weeks on fears that clients will use AI to build their own software. This thesis makes light of the high diversity with the software segment, and notably the difference between horizontal and vertical integration systems, which are not exposed to AI to the same degree,” Melman continued. “It also overlooks the Jevons paradox. This suggests that owing to the improved efficiency and lower cost of developing software (thanks to AI), demand will in fact rise rather than shrink.” While he understands investors’ strong reaction to uncertainties triggered by the AI-driven evolution of software business models, he considers the market response to be excessive.

“The recent nomination of Kevin Warsh to serve as the next chair of the Federal Reserve (pending Congress approval) was not a revolution, but the news hit gold and metal markets,” Melman continued. “Indeed, Kevin Warsh is in favour of a very small Fed balance sheet. However, it seems that paring back the central bank's financial footprint any further would require a new regulatory framework for commercial banks. In other words, this goal is possible – but over the longer term. On the other hand, Warsh’s belief that AI-related productivity gains will help lower inflation and allow for a looser monetary policy remains valid. To some extent, Warsh’s appointment as Fed Chair is rather favourable to bond and equity markets, and probably for gold," he said. 

In this environment, Melman has raised his exposure to emerging equities. After lagging for several years, these stocks stand to benefit in his view as investors reposition their portfolios away from the US – now that the AI cycle has reached maturity – and seek out new AI-related stocks (in China). “Emerging equities should also benefit from the prospect of rate cuts in the US and the upward trend on metal prices (Latin America),” he added.

Japan impact
In Japan, the Liberal Democratic Party’s (LDP) landslide general-election victory has given Prime Minister Sanae Takaichi full powers to push on with her reflationary agenda. Subsequently, Japanese stocks jumped to a high. Melman remains overweight in Japanese equities. A number of investment managers such as SuMi TRUST, a large Japanese asset manager, Invesco and Amundi are also positive about Japanese equities in 2026. See here and here.

Melman continues to favour the broadening theme as he feels that AI is over-played by producers but downplayed on the user side.

In fixed income markets, Melman prefers financial and hybrid corporate bonds (a pool essentially comprising investment-grade bonds), as well as emerging bonds. Spreads are narrow but private sector bonds seem less exposed to the risk of ballooning public deficits. Melman prefers short and intermediary maturities, which are more sensitive to monetary policy and less to fiscal policy.