Seek quality growth
We think the idea of seeking quality growth should apply broadly to investors’ equity holdings.
Recent earnings growth has been largely driven by firms with competitive advantages and exposure to structural drivers that have enabled them to grow and reinvest earnings consistently over time. We think that trend will continue, and investors should tilt toward quality growth to benefit.
Global quality wealth compounders
Global quality wealth compounders
Companies that can reinvest their earnings at returns consistently above their weighted-average cost of capital generate strong free cash flows and compound their intrinsic value over time, which creates long-term sustainable value for shareholders.
To benefit from this, we recommend companies with a competitive edge, pricing power, and high barriers to entry, which are often a result of years of investment in brand equity or technological innovations. A history of disciplined capital allocation, a strong balance sheet, and consistent profit growth are also key markers. We find that such businesses have a track record of delivering solid risk-adjusted shareholder returns over time.
“Europe's Magnificent 7”
“Europe's Magnificent 7”
The US’s “Magnificent 7” has attracted a lot of market headlines over the past 18 months. But we can also find an equivalent group of seven highly profitable and innovative companies headquartered in Europe that are global leaders in their respective industries. Consensus (FactSet) expects these companies to deliver average sales growth of 9%, 13%, and 9% for 2024, 2025, and 2026, respectively. We expect these stocks to deliver high and durable earnings growth, strong free cash flow generation, and with lower volatility than the broader market.
Quality in Asia
Quality in Asia
We believe the largest benchmark heavyweights across the MSCI Asia ex-Japan index's 10 markets offer one of the highest-quality opportunities in volatile markets. Driven by strong industry leadership, above-average EPS growth, free cash flow margins, higher return on equity, and favorable valuations, we expect these stocks to continue to outperform the broader index in the next 3–5 years. In addition, within China, we recommend select state-owned enterprises that are active in their commitment to dividend payments.
Thematic growth
Thematic growth
Quality growth can also often be found in companies exposed to structural growth themes such as sustainable development. We see particular opportunities in companies enabling the energy transition, as well as in those offering products and services to reduce ocean pollution and water scarcity.
- Energy transition. We think that global greentech companies and investments in renewable energy infrastructure should be well positioned amid the structural global drive to reduce carbon emissions. Greentech includes companies engaged in green energy, infrastructure, manufacturing, and mobility. And with the rise of AI adding to electricity demand, investment in the renewables sector is likely to rise even further. AI data centers in the US require up to eight times more electricity than traditional ones, for example, according to the IEA. That said, investors should be mindful of potential risks posed by the US election, and remember that investments in fossil fuels will also continue—albeit likely with a focus on the cleanest fuels.
- Blue economy. The recent signing of the High Seas Treaty highlights the increased policy focus on pollution prevention and ocean conservation. As a result of this trend, we expect increased demand for companies offering waste and wastewater treatment solutions, next-generation chemicals, and innovations in plastics. We also think that companies focused on innovation in product design and industrial processes which help reduce pollution at source will have a competitive advantage, as customers may increasingly demand products with a lower environmental impact.
- Water scarcity. Population growth, rising living standards, and industrialization in emerging markets are putting pressure on global water supplies and are leading to increased investment in water infrastructure across the world. We estimate the market size of industries associated with “water scarcity” is more than USD 655 billion, and we expect it to grow at a mid-single-digit annual rate on average over the next few years. Some of the biggest areas include wastewater treatment, water utilities, and companies that provide equipment for water exploration, distribution, and treatment.
