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Dispersion across the tech mega caps suggests a shift in focus beyond the IT sector, potentially leading to a broader re-rating of various industries, creating a ripple effect across global equity markets.
Beyond the Magnificent 7: Are markets broadening past tech?
BIG TECH
It may be challenging, but the best approach – regardless of the political noise – is to maintain a long-term view
What could history tell investors about Trump 2.0?
ELECTIONS
By equity portfolio manager Jody Jonsson
What’s next for today’s global champions?
GLOBAL CHAMPIONS
Hacking the AI opportunity
By investment director Steven Smith
ARTIFICIAL INTELLIGENCE
Today’s unique crossroads for markets
By investment directors Steven Smith and John Lamb
ACTIVE MANAGEMENT
THRIVING
IN AN EVOLVING WORLD
First, artificial intelligence (AI) is clearly a topic that is creating hype throughout the world not least in investment circles. AI’s ultimate addressable market is potentially limitless, given its pervasiveness across so many parts of the economy. Finding the right opportunities within this, and separating hype from fact, is a challenge though. Our own AI investment framework focuses on the following areas: compute (semiconductors - or the ‘brains’ of AI), infrastructure, AI model developers, software applications and finally the real-life and end-industry beneficiaries. A lot of work is still required to understand the tangible, long-term AI investment opportunities. A significant difference versus previous technology cycles is that the large incumbents possess many first-mover advantages to deploy AI at scale, such as proprietary data, huge amounts of capital to spend and some of the brightest engineering talent.
Theme 1: AI disruption
Change is a constant but it’s not hyperbole to say that the crossroads global markets find themselves at today could potentially change them forever. Major themes are combining that together pose significant change. And if we’ve learnt one thing in more than 90 years’ of investing in equity markets, it’s that being on the right sight of such major changes can be very powerful for portfolios. We expect these powerful forces to drive far broader market leadership and a much richer, more diverse set of investment opportunities over the next decade and beyond. This will be an exciting period for bottom-up, diversified global stock pickers.
Simple estimate
$1.6tn
$1.9tn
$2.5tn
$4.5tn
???
How to size the TAM?
Total adult population
Total amount of spending
Total vehicle sales
Total amount of IT expenditure
Technology
Smartphones
Digital payments
Electric Vehicles
Cloud / SaaS
Artificial Intelligence
Investment Director, Capital Group
Steven Smith
CONTRIBUTORS
John Lamb
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CONTRIBUTOR
Harnessing generational shift is today’s dynamic markets
Active management
”AI’s ultimate addressable market is potentially limitless, given its pervasiveness across so many parts of the economy“
Industries
Automation and efficiency solutions
Hydrogen and carbon capture and storage technologies
Buildings
Energy management and control systems
Sustainable construction methods and materials
Low-emissions fuels
Charging infrastructure and battery technology
Vehicle electrification
Transport
Power
Renewables
Power grid modernisation
Most immediate
Longer-term
Signs are emerging of an ‘industrial renaissance’ driven by several long term trends, setting the stage for the kind of capex super cycle not seen in decades. These trends include the energy transition, data centre build-out, rising defence spending, and the reconfiguration global supply chains. Essentially, old-economy cyclical manufacturers could become critical enablers of our future economy and, in doing so, transform themselves into secular growth companies. The next decade and beyond could present a rich and diverse set of investment opportunities, something potentially much grander than we’ve seen in the past decade. This raises the importance of considering strategies that can navigate significant market shifts, while remaining true to their objectives and philosophy.
Theme 3: A new industrial renaissance
Medical innovation is entering a golden era, which will likely enjoy multi-decade tailwinds. The first wave of innovation was largely about chemistry − simple compound drugs to address everyday sicknesses – with the second wave moving from inorganic chemistry to organic to tackle more complex diseases. Now we are at the beginning of the third wave that could be truly transformative. Breakthroughs in genetics are leading to the creation of highly targeted, interventions to tackle a wide range of disorders. This genetic era coincides with the exciting developments of AI. Currently, over 90% of all experimental medicines in development are expected to fail, but studies suggest using AI to expedite drug discovery - even simply by processing huge expanses of data much more quickly - could lead to 50 additional novel therapies over the next 10 years1.
1. Source: Morgan Stanley Research. As at March 2023.
All information as at 30 September 2024 and attributed to Capital Group unless otherwise stated.
Theme 2: The next wave of healthcare innovation
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Key to this question is the fact AI’s potential total addressable market is open-ended and hard to estimate versus previous new technology cycles. For example, it was relatively easy to produce a simple estimate of the total addressable market for smartphones or electric vehicles by understanding the total adult population or total global vehicle sales. For AI, given its potential pervasiveness across so many parts of the economy, that market is extremely difficult to size. What we can say is that the AI cycle appears likely to move quickly compared to those in the past. If we take cloud computing as a comparison, that cycle began around 2008 and more than a decade later, we estimate roughly only 30% of corporate workloads are off premise and in the cloud. In large part, this is because replacing existing IT architecture is a complex and time-consuming process By comparison, AI is very different and can simply be additive in some cases: if a software vendor adds AI functionality to an existing product, for example, it could be deployed in days or weeks rather than years.
Will the AI-driven technology cycle be different?
Investors are terrified of missing out on the next big thing. And AI has been widely heralded as just that, thanks in large part to hyperbolic media coverage – some of which has claimed this could potentially be ‘more profound than the invention of electricity or fire’. However, it’s arguably as important not to get caught up in the hype and instead engage in the opportunities with the highest potential. From an investment perspective, it’s perhaps still too early to have definitive views on real-life and end-industry applications. At Capital Group, our analysts are trying to determine the potential positive and negative implications of AI, understand what factors may accelerate or decelerate the pace of adoption, and think about a potential investment framework for the short- and longer term. We are also analysing how this might compare and contrast to previous significant tech cycles.
Investment Specialist, Capital Group
Broadly speaking, AI is expected to enable efficiency gains, drive down costs, increase innovation and expand total addressable markets for companies. All of which should be positive for investors and also accelerate GDP growth. It is difficult to think of companies and sectors that will not be positively affected by AI in some way but there are areas where the near-term impact is clearer. The big tech incumbents possess many first-mover advantages, including huge amounts of capital and resources to deploy AI at scale. Much is yet to be learnt about AI and what the investment opportunities around this will look like. We will continue to apply our long-term, fundamental-based research to our stock selection, but it is clear this is a very exciting time with some potentially great opportunities to arise.
Given the multi-faceted nature of the AI ecosystem, there is no single ‘correct’ way to map out the investable opportunity set. Our AI investment framework has identified key areas we could target:
Identifying the opportunities
All information as at 30 November 2024 and attributed to Capital Group, unless otherwise stated.
Compute. Semiconductors are the brains behind AI, which is compute-intensive at both the training and inference stages. Infrastructure. If semiconductors are the fundamental building blocks of AI, then companies providing the infrastructure are the ‘plumbing’. Models and applications. Software companies ‘productising’ AI could benefit meaningfully and fast. Beneficiaries. AI is still at an early stage of development - a deep research-based approach is needed to identify long-term potential winners and avoid losers.
Most Powerful supercomputer (gigaflops)
Cost per TB of solid state storage
All data created so far
GPT MODEl SIZE (BILLIONS OF PARAMETERS)
2016
2018
2020
2022
2,000
1,500
1,000
500
0
$250
$200
$150
$100
$50
$0
Speed
Data
Algorithms
Cost
Storage
0%
20%
40%
60%
80%
100%
Next 3 years 57%
Human history 43%
GPT (2018)
100
10
1
GPT-2 (2019)
GPT-3 (2020)
GPT-4 (2023)
Convergence of powerful trends underpins an inflection point in the capability to deliver Generative AI
All data as at 31 December 2022. TB: terabyte. GPT: Generative Pre-trained Transformer. 1. Source: TOP500 2. Source: IDC 3. Source: Our World in Data 4. Source: techtarget.com
3
2
4
Artificial intelligence
”It is difficult to think of companies and sectors that will not be positively affected by AI in some way but there are areas where the near-term impact is clearer“
The tensions between the world’s two biggest economies have thrown up challenges for investors around the world. But even against this backdrop, multinationals are doing what they do best: finding ways to adapt and succeed regardless of growing headwinds. For example, in the computer chip industry, TSMC and ASML are both reacting by expanding their operations globally. TSMC is building new manufacturing plants in Arizona and Japan, while ASML is bolstering operations in Germany, Connecticut and California. Global champions have the potential to do well in almost any environment, and we have seen these companies continue to thrive despite US-China concerns.
Ability to navigate US-China tensions
I often get asked if I’m worried about the impact of shifts in global trade. After all, I invest in multinational companies which many assume are the most vulnerable of all. However, I believe the opposite is true, multinationals are often best-placed to navigate an uncertain environment. I call these companies ‘global champions,’ for four reasons.
Portfolio Manager, Capital Group
Jody Jonsson
A multi-local strategy is also crucial for companies based in the US, Europe and Japan that are looking to stay relevant or expand into faster growing emerging markets. Many of those countries — China, India, Brazil, etc. — are nurturing their own multinational giants, posing a significant risk that they could leapfrog multinationals by being more in touch with local markets. In my view, that dynamic is a bigger threat than any geopolitical or trade-related issue. The world is facing uncertain times but it’s important, as investors, to avoid focusing too much on the noise. Businesses face different obstacles nearly every day, and the current environment is no exception. In the meantime, this shifting global landscape presents opportunities for stock pickers focused on fundamental research. Not every company will get it right, and it’s our job to find those that could become the next global champions.
Exposure to fast growing markets
The need to reconfigure supply chains is one many challenges multinationals are having to contend with. Due to factors like COVID, geopolitical tensions and protectionism, many companies are moving away from single-source supply chains as reliability and robustness are prioritised over cost and efficiency. This has led to a rise in the construction of new manufacturing plants, logistic hubs as well as digital infrastructure. Industrial companies like Caterpillar are well-placed to benefit from the broader build-out of infrastructure. In particular, its diesel and gas generators play a crucial role in data centre facilities, which require a constant and reliable power supply to ensure uptime, prevent data loss or service interruptions.
Beneficiaries of infrastructure build-out
Multinationals have expanded beyond their domestic markets because they are usually run by smart, tough and experienced managers. These battle-tested companies tend to be favourably positioned to survive and even thrive under pressure. Novo Nordisk is a good example. The Danish healthcare company has been an innovator in diabetes treatments and has invested heavily, and cleverly, to tackle soaring demand for its treatments. While supply has not always met demand, Novo Nordisk has taken definitive long-term steps to streamline supply. It has agreed to take over plants in Italy, Belgium and Indiana, and invested $9.5bn in other global production sites to help ensure supply of its medication to its patients around the world.
Experienced management teams
A new breed of multinational companies has arrived
Includes all companies within the MSCI Emerging Markets Investable Markets Index (IMI) as of 31 December 2000 and 31 July 2024. Sources: Capital Group, FactSet, RIMES
Global companies cater to customers all over the world
As of 31 July 2024. Revenue by region is estimated by FactSet based on most recently reported figures. Sources: Capital Group, FactSet
653
9
158
86
211
52
213
19
54
44
90
65
26
29
25
11
Japan
United States
Korea
China
Taiwan
Other
Europe
15
14
7
6
55
Asia Pacific
Africa and Middle East
Latin America
18
51
North America
ASML (Netherlands)
Thermo Fisher Scientific (United States)
Novo Nordisk (Denmark)
Caterpillar (United States)
Revenue by region (%) across select companies
Global champions
”Multinationals have expanded beyond their domestic markets because they are usually run by smart, tough and experienced managers“
India
South Africa
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The 2024 US presidential election was particularly divisive, with numerous claims thrown either way about all manner of important topics. However, most statements about the economy weren’t particularly insightful as, historically speaking, elections have made little to no difference when it comes to long-term investment returns. Global stocks have trended up regardless of whether a Republican or Democrat won the White House. For instance, a US$1,000 investment in the MSCI All Countries World Index (ACWI) in 1970 would have been worth almost US$150,000 now. During that time there have been six Republican and four Democratic presidents, with the index climbing regardless.
Which party has been the best for global investors?
When Donald Trump won the US election, his victory was picked apart by academics, journalists and political analysts with everyone keen to know what this meant for the US, and the world. However, as investors, it’s important to ignore short term noise and instead adopt a longer-term view. Looking just at the data, and stripping out the political rhetoric, what might we expect given how markets have fared in previous US election cycles?
Politics can create a lot of market noise but for investors it might be wise focus on other areas that may have a more material impact. Historically, US elections have made only a marginal impact on global equity markets, with periods of high inflation and low growth having a much greater negative effect on the MSCI All Country World Index. Likewise, low inflation and high growth have supported stronger equity returns. In fact, returns in periods where US elections took place have not been significantly different from other periods. What tends to matter more to markets is the underlying economic fundamentals. Current political challenges may seem unprecedented but a look at past US election cycles shows that controversy and uncertainty have surrounded almost every campaign.
Economic fundamentals have a bigger impact than elections
It can be easy to get carried away with rhetoric and headlines, but it’s important to maintain a long-term view. Nevertheless, many investors have tried to time the market in an election year. History shows that investors have poured into money market funds – traditionally one of the lowest risk investment vehicles – with greater frequency ahead of elections. By contrast, equity funds have seen the highest net inflows (total deposits) in the year immediately after an election which suggests that investors want to minimise risk during an election and wait for uncertainty to subside before reverting. It may be challenging, but the best approach – regardless of how loud political figures like Trump can be – is to maintain a long-term view. A focus on individual companies, their underlying fundamentals and how they are positioned to navigate different economic conditions could be a more rewarding investment strategy.
What now for investors?
Growth of a hypothetical US$1,000 investment in MSCI ACWI
How global equity market respond in different environments
Past results are not a guarantee of future results. Chart shows the growth of a hypothetical US$1,000 investment made on 31 March 1970 through 29 February 2024. Dates of party control are based on inauguration dates. Values are based on total returns in USD. Shown on a logarithmic scale. Sources: Capital Group, RIMES
MSCI ACWI average 3-month return relative to all periods
Past results are not a guarantee of future results. As at 31 December 2023. Returns in US dollar terms. Inflation based on US Consumer Price Index seasonally adjusted year-over-year. Growth based on seasonally adjusted US real GDP, percentage change from quarter one year ago. Low inflation/growth: 0-2% and high inflation/growth: >4%. Sources: Federal Reserve Bank of St Louis, Refinitiv DataStream
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
$10,000
$100,000
$1,000
Democratic presidency
Republican presidency
Elections
”Politics can create a lot of market noise but for investors it might be wise focus on other areas that may have a more material impact“
US elections
High inflation
low inflation
High growth
An unavoidable theme for equity investors in recent years has been the dominance of tech stocks. Specifically, the Magnificent Seven – Alphabet, Amazon, Apple, Microsoft, NVIDIA, Tesla and Meta – have had an outsized impact on index returns which has significantly increased concentration risk in the US market. In 2023, despite these stocks only accounting for 2% of the number of companies in the index, they were responsible for more than 60% of returns from the S&P 5001. These stocks have been further fuelled by AI exuberance. However, there are signs this dominance could be beginning to dilute. For one, there has been a dispersion in their returns partly due to each company’s different involvement in the AI boom. NVIDIA and Tesla are both investing heavily in AI, but the former has surpassed competitors through technical leadership while the latter is more exposed to intensifying Chinese EV competition challenges.
Head of Equity Business Development, Capital Group
Katharine Dryer
Investment Director Capital Group
Andy Budden
While market leadership may broaden from here, tech is still central to key investment themes. This is because new tech also relies on old economy resources, including copper, capital equipment and power. Soaring demand for these has been a boon for utility, industrial and mining companies. We have seen some evidence of wider market participation in the second half of 2024, as US-based dividend payers, value-oriented stocks and US small caps all outpaced the tech-heavy S&P 500. Conditions appear supportive for this broadening to continue, with the Fed set to ease monetary policy further and the potential for more favourable regulations in banking, energy and healthcare. Overall, while it will not be one-way traffic, the road ahead for equities appears to be veering closer towards an open highway than a narrow lane.
Still a role for tech as AI boosts old-economy industries
Dispersion among Magnificent 7, a sign of things to come?
AI spending spree boosts old economy industries
Past results are not a guarantee of future results. Source: Datastream. As 31 December 2024. Cumulative total returns for each stock over the period shown in US$ terms
Where next for markets?
We believe the market is now expanding beyond these tech mega caps. It’s possible we could see a broader range of industries do well as secular growth trends impact a wider spectrum of companies across global equity markets. We looked at Federal Reserve (Fed) rate-cutting cycles since 1982, in recessionary and non-recessionary periods, and tracked how different sectors reacted. In a soft-landing scenario (that is when the US avoided a recession) there was evidence equity markets tend to broaden. Three easing cycles occurred in non-recessionary periods. In the first part of the cutting cycle, tech stocks outpaced other sectors. This bears some parallels with today’s market where tech stocks have been the key drivers of returns. However, the market overall did better in the second part of the cutting cycle. Not only were returns generally higher, but they were also spread across a broader range of sectors, including consumer staples, healthcare, real estate, utilities and financials. Looking ahead, long-term trends in the global energy transition, healthcare developments such as obesity drugs, and the realignment of global supply chains suggest interesting opportunities remain outside tech. A flexible approach to global investing can also open the door to a wider pool of companies.
Industry
Demand
Mining
Construction materials
Utilities
Power demand
Industrials
Capital equipment
1. Source: Bloomberg, 12 months to 31 December 2023
Dispersion across the tech mega caps suggests a shift in focus beyond the IT sector, potentially leading to a broader re-rating of various industries, creating a ripple effect across global equity markets
big tech
”While it will not be one-way traffic, the road ahead for equities appears to be veering closer towards an open highway than a narrow lane“
