AI and Geopolitical Risks Are Mispriced, Paul Taubman Says
Summary
- Geopolitical and AI disruption risks are currently mispriced by the market, with tail risks being ignored in favor of base-case optimism.
- Long-term M&A volumes are expected to grow significantly due to corporate needs for scale, vertical integration, and supply chain onshoring.
- AI will cause massive disruption in the software sector, making terminal valuations highly uncertain and creating "roadkill" among incumbents.
- The current US administration is highly pro-business and has drastically increased early HSR terminations (approx. 400 vs 6-7 previously).
- Despite the pro-growth regulatory environment, horizontal M&A in consumer goods will likely be blocked if it threatens affordability and raises prices.
Trade Ideas
There's uncertainty about software, how to value it, terminal value... there's gonna be a lot of roadkill left behind. AI is actively destroying the economic moats of traditional SaaS companies. Because it is currently impossible to know which software incumbents will survive and which will be replaced by AI agents, assigning long-term terminal values to broad software indices is highly speculative. AVOID broad software ETFs until the market can accurately price the winners and losers of the AI transition. Software incumbents may successfully integrate AI into their existing platforms, expanding their margins and causing the sector to rally.
We're dealing with a war where energy prices have spiked. All of a sudden, commodity costs are through the roof... you're seeing choke points in the supply and transport of energy. The market is mispricing geopolitical tail risks. Ongoing global hostilities and supply chain choke points will maintain a structural bid under energy equities as supply remains constrained and transport costs rise. LONG energy producers as a hedge against mispriced geopolitical volatility and supply chain disruptions. A sudden peaceful resolution to global conflicts or a severe macroeconomic recession could cause a sharp drop in energy demand and prices.
M and A activity should increase because the world is speeding up. CEOs, boards of directors need to adapt... Scale matters increasingly. You need to onshore increasingly. Independent advisory firms will benefit from a massive secular tailwind as corporations are forced to restructure, vertically integrate, and onshore supply chains to survive. Furthermore, boutique firms using AI to enhance senior banker productivity will expand margins without needing to bloat their junior headcounts. LONG independent investment banks positioned to capture the inevitable return to high-volume, complex corporate dealmaking. Short-term geopolitical shocks and market volatility could delay the M&A pipeline, pushing revenue realization further into the future.
Horizontal consolidation that creates the risk of price increases on consumer goods may be a no fly zone. While the current administration is broadly pro-deregulation, affordability is their cornerstone economic policy. Investors betting on M&A premiums in the consumer staples sector will likely be disappointed, as the FTC/DOJ will block mergers that threaten to raise everyday consumer prices. WATCH consumer staples for broken deal risks; avoid playing M&A arbitrage in consumer-facing companies. Consumer companies may successfully argue that their mergers will create supply chain efficiencies that actually lower costs for consumers, gaining regulatory approval.
