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4 structural shifts driving markets over the next decade

You may have clients who feel like they’ve "missed the AI boat”. Who wouldn’t, with Nvidia’s share price up nearly 850% over the last five years?

But Capital Group’s Investment Director Matt Reynolds is adamant that the AI rally isn’t over - it just will look very different over the next decade.

The next leg of gains, he argues, will come from second- and third-order beneficiaries - companies solving the unglamorous problems of the AI world. Think power delivery and data centre infrastructure, for example.

He doesn’t dismiss bubble concerns outright. He argues that, unlike the dot-com boom and bust, today's rally is being backed by real earnings growth, with aggregate earnings growth for the S&P 500 hitting 20% year on year. That said, he’s worried about concentration in the world’s favourite AI-linked mega-caps - and warns that index investors could be on “autopilot”.

Beyond AI, Reynolds points to three other durable trends worth watching over the next decade. This includes the "rewiring" of global supply chains (as the world shifts towards just-in-case manufacturing). Reynolds believes this is creating winners among aerospace suppliers and industrial firms building out data centre capacity.

He also points to changing consumer spending habits as an enduring theme - as more of us choose to spend our dosh on experiences over goods. This benefits the travel industry, cruise lines and streaming services.

In healthcare, he’s most excited about pharmaceutical innovation (GLP-1s being the obvious example). Although single-product biotech and pharma names carry concentration risk of their own, he notes.

In this episode, Reynolds takes advisers through these major structural shifts, names the stocks he's most confident about right now, and reveals the one mistake even the most seasoned advisers make with their "diversified" portfolios.

5 lessons from Capital Group’s Matt Reynolds

1. Are your clients’ portfolios really diversified?

Your clients’ equity exposure may look diversified (it may hold lots of different companies), but it could still be at risk of concentration in growth drivers. It’s worthwhile figuring this out in an increasingly volatile market, Reynolds says.

2. Resources/mining may not be great for those with longer-term horizons

Capital Group largely avoids resources and mining stocks. Supply is somewhat predictable, but price isn’t, and that's what the team’s five-to-eight-year investment case rests on.

3. Concentration can be a deal-breaker in healthcare

Geography "doesn't even rank" in Reynolds’ stock selection process, but revenue, management, and growth prospects do. However, he does warn that pharma companies reliant on just one or two products can be flogged if one of them "hits a speed bump."

4. Resist the urge to rotate into the “next big theme”

An adviser doing this might be right two times out of three, but it’s only going to get harder in an increasingly volatile environment. Reynolds believes advisers should stick with long-term, research-led processes instead.

5. Your clients haven’t missed the AI trade

The AI trade has already rotated once (from semiconductor stocks to memory players). Reynolds believes the next big opportunity is in infrastructure and power.

Join us for the FinFest Exclusive Preview

FinFest is shaping up to be the biggest thing we’ve done at Equity Mates. 2,500+ attendees, five stages, food trucks, bars and a full day of content for Australians of all investing levels.

The day before, we’re hosting a preview for financial advisers. You’ll be able to see the FinFest set up before anyone else, watch us interview Joe Aston, and hear six fund managers pitch their best ideas to a Shark Tank-style panel of experts.

The event is free for financial advisers to attend.

There are limited spaces, so you do need to reserve your ticket at: https://equitymates.com/finfest-industry/

Investing in a changing world

Change creates opportunities.

From advances in technology to shifts in global trade and consumer behaviour, some businesses are better placed than others to benefit from a changing world.

Capital Group New Perspective Fund (AU) looks for these opportunities by investing in companies globally that can grow and adapt over time.

With a diversified portfolio spanning sectors, regions and industries, the fund aims to provide investors with access to long-term growth while reducing reliance on any single market, theme or company.

This week’s chart

Reynolds’ “chart of the week” will hopefully help you put your clients at ease.

On the left, you’ll see the earnings vs the market cap of the biggest companies in the world, the “Four Horsemen”, from 1998 to the end of 2001. On the right, it’s the earnings vs the market cap of the world’s biggest AI companies (Alphabet, Amazon, Apple, Broadcom, Meta, Microsoft and Nvidia).

“For those of us who were investing back then, we all have a scar in our minds of that period of time, and we all saw stocks rallying very hard with no earnings backing them up,” Reynolds says.

This time around, we're seeing real earnings growth and revenues, he added.

“It's up to the analysts and the PMs to form a view of how durable that is … But overall, even when we aggregate it, we're seeing reasonable earnings growth. That gives you a degree of confidence that might be higher this time around,” Reynolds says.

In case you missed it

Last week, we were joined by Regan van Berlo from Milford for a breakdown of the firm’s latest research into the mathematics of investing for retirement. In this episode, you’ll learn why the strategies that built your clients’ wealth in accumulation could be quietly destroying it later on in life.

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