Transition investing — investments in sectors crucial to the AI revolution — is the “perfect” hedge for investors worried that the AI boom might be a bubble, according to equity strategists at Bank of America.
Fears that AI — which BofA called a “fundamental revolution that is about to change everything” — are falling, the strategists wrote. However, “concentrated capital in AI-linked names heightens vulnerability to factor drawdowns, policy shifts, rate shocks, and power-supply constraints.”
Transition investing, BofA said, offers “a way to invest in AI, without investing directly with AI.”
The investment strategy centers around sectors such as transition metals and defense that, while systemically important to the AI buildout, remain strong on their own under growing demand dynamics.
On the infrastructure side of the AI boom, power generation and the industrial metals — copper, aluminum, silver, and others — needed to construct and provide electricity to the growing array of data centers make investments in those sectors strong directional bets on AI, BofA said.
Security resilience, powered by the defense sector, is also seeing growing demand as nations expand their defense budgets and more attention is paid to next-generation combat systems, the strategists said.
“Transition strategies like defense, infrastructure, and transition metals are all critical to the AI revolution,” the strategists wrote. “However, share prices in these sectors offer relative resilience against AI-driven swings, anchored by policy, geopolitics, and supply chain fundamentals.”
BofA also noted that the defense, infrastructure, and transition metals sectors have maintained a market correlation to AI of less than 50%.
Some of BofA’s recommended equities include BAE Systems (BAESF), Vulcan Materials (VMC), Tencent Holdings (TCEHY), Elm Company (7203.SR), CMOC Group (3993.HK), and HD Hyundai Electric (267260.KS).