Opportunities beyond technology

We believe that focusing on quality companies-those with strong balance sheets, high profitability, and resilient earnings streams-will continue to reward investors in the months ahead. The MSCI All Country World Quality index has returned 6.7% year-to-date compared with 4.5% for the overall MSCI World Index, as of 26 April. While many technology companies meet the “quality” criteria, we can also find many that operate outside the technology sphere as the market rally broadens out.

In Europe, for example, a group of highly profitable and innovative companies that are also global leaders in their respective industries make up what we call “Europe’s Magnificent 7.” With an earnings growth potential of 14% per annum over the next two years, based on consensus, these companies-representing the consumer discretionary, consumer staples, healthcare, industrial, and technology sectors-have similar earnings growth prospects to the Magnificent 7 in the US. And while they are trading at a premium to MSCI Europe, we think this is justified by their superior and sustainable earnings growth profile, strong free cash flow generation, and lower volatility.

In Asia, we like 10 heavyweight stocks that are driven by strong industry leadership. We expect them to deliver annual earnings growth of 10.3% over the next three years compared with 6.5% for the broader MSCI Asia ex-Japan index.

Investors looking to diversify beyond technology can also gain exposure to other major structural growth themes:

The global energy transition is driving a new wave of private investments underpinned by stimulus programs in some of the world's largest economies. Our "Greentech goes global" selection highlights companies that we believe should play a key role in this transition, including those engaged in green energy, infrastructure, manufacturing, and mobility. In 2023, the world’s renewable energy capacity saw a record increase of nearly 50%, to 507 gigawatts, based on estimates by the International Energy Agency (IEA). And with the rise of AI adding to electricity demand-AI data centers in the US require up to eight times more electricity than traditional ones, for example-the need for more energy production is an opportunity for the renewables sector to innovate, scale up, and invest in infrastructure.

In healthcare, companies that can innovate in terms of new drugs, treatments, and delivery methods have an edge in capturing growth by addressing unmet medical needs and improving patient outcomes. Beyond obesity treatment, which has been the subject of much attention, promising developments are underway for the treatment of Alzheimer's, RSV, and influenza. In addition, increased connectivity and computing power are a boost to robotics and miniaturization in the medtech industry, while biopharma is exploring AI-driven methods to enhance drug discovery, diagnostics, and personalized medicine, including in fields like cancer care. Currently, we have a tactical positive view on US healthcare, with a particular preference for the medical equipment and supplies industry; the life sciences tools and services industry (both thanks to strong end-market growth and minimal policy risk); and the managed care sector (where pricing power and lower input costs support profit margins and upgrades to earnings forecasts).

The blue economy, which is expected to reach USD 3tr in size by 2030, provides more than 30 million jobs, making it one of the most important nature-related economic activities. The ocean is the world’s largest carbon sink, and oceanic health is key to global climate resilience and long-term economic development. But according to the UN, SDG 14: Life below water remains the most underfunded of the 17 sustainable development goals. The landmark UN High Seas Treaty signals rising political, regulatory, and social pressure to address the issue. With companies increasingly expected to address their business impact on the ocean, we focus on two topics of key investment relevance: pollution prevention and ocean conservation. Furthermore, we see particular importance and opportunities for investor engagement and active dialogue to align corporate and investor interests.

Not to be outdone are US small-cap stocks and select European small- and mid-cap stocks. In the US, we like Russell 2000 companies that have discounted valuations and could benefit from potential catalysts such as interest rate cuts, increased M&A, and strong earnings growth. While 28% of the US small-cap index is not profitable, many are in high-growth sectors like healthcare and technology, and most have sufficient cash to remain operational for years to come.

Smaller European companies (MSCI EMU SMID) have underperformed their larger peers in the past two years but are now trading at appealing price-to-earnings valuations. An improving economic environment, potential interest rate cuts, and promising earnings growth could act as catalysts for better performance.

We also see compelling potential to position for longer-term sustainability development in small- and mid-cap firms. This can be achieved, first, via ESG engagement equities, where fund managers aim to drive sustainability-related improvements that impact costs, revenues, and operational efficiency. Second is via ESG thematic equity allocations in longer-term investment themes where select small- and mid-cap firms may offer exposure to multiyear growth prospects as the world seeks to transition toward more nature-aligned and equitable economic systems.

For those investors looking to add more cautious exposure to markets, we recommend seeking defensive structured investment strategies. For example, for those looking to potentially buy on dips and get a stable cash flow while waiting, select stocks with higher implied volatility could be suitable for yield-generating structured investments. Another option to invest in a more defensive way is by using the currently high-rate environment to switch from direct exposure into capital preservation structured strategies.