Man Group Sees AI Hype and Geopolitics Driving Market Volatility

Investment firm Man Group PLC expects the third quarter to bring continued market volatility, fueled by cycles of AI booms and busts, alongside geopolitical tensions in the Middle East. The firm's analysis indicates that Iran-related issues and artificial intelligence (AI) dominated market narratives in the first half of the year and are likely to continue setting the tone in the coming months.

Man Group forecasts that renewed Middle East conflicts, particularly concerning Iran, could again pressure oil markets. Simultaneously, investor focus on AI-related companies has created narrow market leadership. This AI exuberance, coupled with the difficulty of pricing the ecosystem, is expected to increase volatility.

Against this backdrop, Man Group has downgraded its outlook for traditional Equity Market Neutral strategies. The firm anticipates that generating alpha (excess returns) will become more challenging in the current volatile landscape, especially given the risk of crowded trades. However, Man Group sees opportunities arising from AI-adjacent corporate activity.

Consequently, the firm has upgraded its Event Driven Special Situations strategy to positive and maintained its positive view on Convertible Arbitrage. These strategies are positioned to potentially benefit from specific corporate events and restructurings, rather than broad market trends.

Man Group emphasizes the importance of active management strategies for navigating this uncertain environment, where passive exposures risk being slow to react. The current market dynamics, characterized by a focus on momentum, could lead to overcrowding in certain trades, increasing risks should a market consolidation occur.