Signal over Noise: Finding quality beyond AI

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

Digital economy stocks face AI disruption as agents take over commerce and question advertising efficacy.

Digital economy stocks remain at risk. AI agents will likely take over more and more digital commerce, which questions the efficacy of advertising. The recent lack of momentum in the core business of some digital incumbents in last week's earnings added to these concerns. The roughly $1 trillion advertising market is therefore susceptible to AI disruption.

“We continue to see risk to the digital economy stocks. They are prey to AI disruption from agents that will likely take over more and more digital commerce, questioning the efficacy of advertising.”at 0:54

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

AI coding tools make software easy to replace, leaving the roughly $500B SaaS market exposed to disruption.

AI coding tools make it easy to replace existing software with better and cheaper offerings. Because of this, the roughly $500 billion software-as-a-service market is susceptible to disruption by AI, which is why it sits alongside advertising among the exposed digital-economy segments.

“AI coding tools make it easy to replace software with better and cheaper offerings. ... the $500,000,000,000 software as a service markets are susceptible to disruption by AI.”at 1:09

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

AI-resilient quality stocks should complement AI beneficiaries, since quality has beaten broader indices.

Quality has outperformed the world and broader US indices by well over 1% annually over the last ten years. Indices tend to include digital incumbents whose moats are being tested by AI-native competitors. The speaker therefore suggests overlaying an AI-resiliency factor and focusing on basic-needs sectors such as healthcare and consumer staples, to complement AI beneficiaries in a diversified equity portfolio.

“Over the last ten years, quality has outperformed the world and broader US indices by well over 1% annually. ... we suggest overlaying an AI resiliency factor and focus on subsections of the economy that are based on basic human needs, such as healthcare and consumer staples.”at 1:42

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

Outpatient clinical operators are AI-resilient, protected by physical presence and certificate-of-need barriers.

Publicly traded operators of physical medical centers and rehabilitation facilities are protected by a physical footprint and regulatory barriers. Local zoning and certificate-of-need rules require a new competitor to prove unmet demand, which gives incumbents a localized geographic monopoly. With an ageing demographic tailwind, the subsector delivers non-cyclical revenue that is insulated from immediate AI replacement risk.

“The economic [moat] protecting these businesses is twofold: it is physical and it is wrapped in regulatory barriers. ... This grants existing operators a localized geographic monopoly.”at 2:34

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

Crop processors controlling ports and mills are AI-resilient toll takers earning a spread on each ton.

Within consumer staples, agricultural [processors] control physical bottlenecks. They operate ports and mills that turn raw crops into essential ingredients, and they collect a spread on every metric ton processed. Because the business is physical and bottleneck-based, it is considered insulated from AI disruption.

“Within this space, agricultural [processors] act as an industrial tool both by operating ports and mills that turn raw crops into essential ingredients. They collect a spread on every metric ton processed.”at 3:24

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

Food distributors' refrigerated truck networks and hubs act as toll bridges that are AI-resilient.

Food distributors use networks of refrigerated trucks and distribution hubs as centralized toll bridges. They charge a markup to move products to fragmented end markets such as restaurants and hospitals. This physical network position is presented as a toll-taking model insulated from AI replacement.

“food distributors utilize their networks of refrigerated trucks and distribution hubs as centralized toll bridges. They charge a markup to transfer products to fragmented end markets like restaurants and hospitals.”at 3:42

Ulrike Hoffmann-Burchardi · UBS Global Wealth Management

Membership warehouses are AI-resilient toll takers, with recurring annual fees cushioning retail volatility.

Membership warehouses leverage scale to sell goods near cost, which makes them a retail-interface toll taker. They cushion retail volatility with an annuity by charging consumers a recurring annual fee. This recurring fee income makes the model a defensive, AI-resilient consumer staples segment.

“Membership warehouses leverage scale to sell goods near cost. They cushion retail volatility with an annuity by charging consumers a recurring annual fee.”at 4:00