5 key investment themes for the long term

At the Morningstar Investment Conference in Sydney this week, Capital Group investment director Matt Reynolds outlined his belief that there’s a huge transition happening in today’s markets.

He says we’re moving away from a 40-year environment of winner-takes-all, growth-at-all-costs, and free money, and towards one that’s more balanced, offering broader opportunities in areas such as healthcare and industrials.

He outlined the following five long-term investment themes Capital Group is focusing on now.

1. New growth: acceleration in adoption of new-tech

There’s a lot of hype about artificial intelligence (AI) at the moment. And after Capital Group analysts and managers spent a week in Silicon Valley talking to companies about AI, the firm believes there has been a major shift in AIs’ capabilities and that it’s impact will be far-reaching.

Reynolds says it feels like the Y2K era—around the early 2000s—from which several extraordinary companies emerged, such as Alphabet (GOOG). And it also reminds him of so-called ‘S-curves’ in technology, where innovation doesn’t happen in a linear way, but rises exponentially instead. 

"The pace of innovation seems faster than ever," Reynolds says.

AI should drive significant demand in cloud providers and semiconductors, Reynolds says.

2. 'Golden age' of healthcare

Major investment during the Covid pandemic saw drug developers producing vaccines and therapies in record time. But Reynolds says we're only now entering a 'golden age' for the secrot, with major advances in healthcare imminent. 

“We’re in an age of discovery which could potentially be the most fertile time that investors have seen for 20 to 30 years," he says.

He says companies are on the verge of solving health issues such as obesity and diabetes.

"These drugs have the potential to extend lives and generate billions of dollars in revenues for companies able to develop them successfully," he says.

"Of course, not every new drug will be a success so the key for selective investors is to understand both the science and the business opportunity."

The flow on effects would be 'pretty revolutionary' for global public health, he says, noting drugs that can tame obesity might also solve comorbidities—where a person has more than one disease or condition at the same time.

"Then there are all the resources that could be directed to other purposes if we didn't have to spend them on all the things that go along with obesity and diabetes."

Reynolds is also bullish on other healthcare areas including the peronalisation and digitalisation of medical services.

3. Reshoring supply chains

Reynolds says he’s often asked by clients whether the world is de-globalising or not. He answers that yes, it is happening, though he prefers another term: ‘multi-localisation’.

What he means by this is that companies are moving away from single sources of supply. They are focusing on resiliency and redundancy, rather than just efficiency.

During Covid-19, companies realised that they may have been too reliant on one country for their supplies. For example, many manufacturers relied exclusively on China for production.

Covid-19 awakened them to the dangers of this. Since then, they’ve moved to diversify supply sources to countries such as Vietnam, Bangladesh, or even back to their home countries.

Think of Apple (AAPL) sourcing semiconductor chips from a new US$12 billion fabrication plant in Arizona in the US, being built by Taiwan’s (TSM).

4. Global champions

Reynolds thinks the biggest beneficiaries of this reshoring of supply chains will be multinationals.

These companies already have diverse supply chains, and their long histories ensure that they’re used to supply disruptions in certain countries. If de-globalisation does happen, these companies can move quickly where others may not be able too.

For these reasons, Reynolds calls multinationals ‘global champions’.

“I think those global champions could still be in the best position to benefit even if we have a retreat from the levels of globalisation that we had at the peak.”

Companies like LVMH (MC) and Hermes (RMS) are examples of global companies with exceptional ‘local’ capabilities.

5. Industrial renaissance

Reynolds says we’re on the cusp of a global industrial renaissance.

In Europe, it’s the focus on energy security in the wake of Russia’s invasion of Ukraine, as well as increased defence spending.

In the US, he points to the passing of the Inflation Reduction Act (IRA) last year and the Infrastructure Investment and Jobs Act in the year prior. These laws will see the US government dedicating hundreds of billions in tax and fiscal incentives for infrastructure and the expansion of renewable energy. They’ll provide funding to modernise the power grid, build high voltage transmission lines, and mine rare minerals needed to manufacture batteries for storing rare energy sources like wind and solar.

Last year, renewable energy surpassed coal power in the US, generating 22% of the country’s electricity. Reynolds predicts the green energy transition will require trillions of dollars for years to come.

And the likely beneficiaries? Reynolds says old-style industrials should do well from the transition. And the metals industry is set up ‘really interestingly’ given the pending advances in green energy, battery technology and energy distribution. All these advances will require a lot more metals.

There’ll also be more spending to ensure more environmentally friendly buildings.

Industrial companies including Schneider (SU), Daikin (6367), Honeywell (HON), and Carrier (CARR) will be able to help companies to use their own real estate in more efficient ways, Reynolds thinks.