News & Events     |    Sprucegrove Insights    |    Disclosure Documents

2026 Q2 Portfolio Perspectives

by | Aug 5, 2026

AI Mania Grips International Markets

For the past several years, international equity markets have become increasingly narrow.  Many of our global equity clients grew accustomed to hearing us discuss this dynamic in the U.S. through the “Magnificent Seven”– a small group of mega-cap technology companies that drove a disproportionate share of U.S. market returns.  That same pattern has now taken hold internationally, and it has done so with greater speed and intensity.

The early stages of this narrowing began when long-dormant subsectors such as banks and defense rerated sharply on the back of rising interest rates and higher global defense budgets. It then broadened to Japan, where corporate governance reforms sparked significant gains in lower-quality, low price-to-book companies as management teams were publicly pressured to improve capital efficiency. Today, however, it is the AI investment cycle that is dominating international markets. Semiconductor and memory stocks have moved sharply higher—often at a pace best described as parabolic—and a growing set of adjacent industries have hitched a ride on the AI theme.

Periods of thematic leadership are not new, and we have navigated many of them. What stands out in this cycle is the strength of conviction and the speed with which the market is drawing conclusions. We see this in three areas:

  • Capital spending assumptions: Investors appear confident that future AI-driven productivity gains will justify the extraordinary level of spending now underway.
  • Winner/loser judgments: The market has been decisive in labeling perceived beneficiaries and casualties—software and IT services offer a clear example of how quickly sentiment can shift.
  • Supply constraints: There is a high degree of confidence that certain supply-chain bottlenecks will persist, despite history showing that shortages can unwind faster than expected once incentives become large enough.

To illustrate how forcefully the AI theme has shaped markets, consider a few data points. Year-to-date, the gap between the best and worst-performing sectors in the index is striking: Information Technology is up+52.7%, while Consumer Discretionary is down–7.7%—a spread of more than 60 percentage points! From a market-capitalization perspective, countries supplying many of the “picks and shovels” of the AI build-out-most notably Taiwan and South Korea-have vaulted ahead of markets such as China, India, Germany and the U.K. Finally, index composition is being reshaped at the country level. In Japan, for example, companies such as Kioxia (NAND flash memory), SoftBank (through investments in OpenAI and chip designer Arm) and Tokyo Electron (wafer fabrication equipment), at different times, competed with the traditional symbol of “Japan Inc.”, Toyota, for the top spot in market value.

Against this backdrop, it is important to address what has been happening inside the portfolio. Year-to-date, we have participated in parts of the AI-related rally through holdings such as Samsung Electronics (Information Technology, Korea), Taiwan Semiconductor (Information Technology, Taiwan), Shin-Etsu Chemical (Materials, Japan), and Renishaw (Information Technology, U.K.), with share price gains ranging from roughly +40% to +180% year-to-date. In each case, we have been trimming these holdings—either to manage position sizing, to reflect valuation, or both.

We also re-initiated a position in Nintendo (Communication Services, Japan), which the market is currently treating as a casualty of the rush to build AI data centers. Specifically, investors are concerned that higher memory prices will pressure unit economics and temper sales of its latest console launch, the Switch 2. We view this interim headwind as an opportunity to start building a position in a high-quality franchise at an attractive valuation. Nintendo controls some of the most valuable intellectual property (“IP”) in the gaming industry, and we believe the business is even stronger today than when we last owned it at the firm (1989–2006) given high-margin growth levers that require minimal capital investment and reinforce the Nintendo ecosystem over the long-term. These include the increase in digital revenue, the extension of Nintendo’s IP into parks and movies, and increase of third-party games.

Finally, while attention has concentrated around AI, large parts of the market we feel have been simply ignored. Since the start of the year, we have initiated positions in bioMérieux (Health Care, France), Unicharm (Consumer Staples, Japan), and Walmart de México (Consumer Staples, Mexico)—areas that are often viewed as “defensive” or “unsexy” in a market dominated by a single narrative.

As the AI theme continues to influence market leadership, we remain committed to a disciplined, quality-focused investment approach. Time and again, markets remind investors how quickly expectations can change—particularly when a consensus view becomes crowded or embedded assumptions become too ambitious. Recent examples include Rheinmetall, a poster child of Europe’s rearmament theme, which has fallen roughly 40% over the past year, or the Magnificent Seven stocks changing their role from market driver to return suppressor (-2% year-to-date). In our view, this reinforces the value of maintaining a diversified portfolio of high-quality businesses trading at attractive valuations, rather than relying on a narrow set of outcomes to drive the portfolio’s return.

2026

2024

2021

2020

Email Us
[email protected]

Subscribe For Updates

Receive insights and company updates from Sprucegrove.

  • This field is for validation purposes and should be left unchanged.

By clicking SUBMIT, you are agreeing to our Privacy Policy. We will retain your email address in order to send the requested information. You can unsubscribe at any time and your information will never be shared with other parties.

x

Please select one option