With AI driving a bumper year for international markets, Mark Nelson, Senior Equity analyst at Killik & Co, shares two investment opportunities that risk being overlooked in the scramble for tech exposure.
Tech is driving strong performance, but we can’t only invest in Nvidia
Global developed equity markets have performed well in 2024, with the MSCI World Index posting double digit returns during the first six months of the year. However, performance has been driven by a relatively narrow set of stocks, with most sectors underperforming the index so far this year.
The two strongest performers have been Information Technology and Communication Services, both of which could be broadly considered “tech”, and both of which have been largely supported by the ongoing investment attractiveness of AI. While we have good exposure to these sectors and believe that developments in and around AI will continue to be a key theme for equity markets for many years to come, we are mindful of the market’s lack of breadth currently. It is important for investors to play the theme from a variety of angles, ensuring they have sufficient exposure to other attractive themes and, consequently, a well-diversified portfolio.
The backdoor to the boom: Don’t ignore the supply chain
One alternative way to take advantage of the AI theme is through companies that are involved in AI’s direct supply chain, such as those businesses responsible for the building out of data centres. One such stock set to benefit from this approach is Schneider Electric, the French industrial company.
Schneider Electric is a global provider of energy and automation products, systems, software, and services. The group operates in two segments: Energy Management, which comprised 79% of group sales in 2023; and Industrial Automation, making up 21% of group sales last year. Its Energy Management business is a play on a number of long-term secular themes, including the build out of data centres, where it has a market leading business providing both products and software for these premises. The company has stated that it is seeing strong growth in this segment of its business in part due to the developments in AI. Beyond that, the company is also a play on the electrification of the global economy, the build out of renewable power, and the requirement for smarter and more flexible electricity networks. Its Energy Management business is the leading electrical franchise globally, has the largest scale of its industry peers as well as attractive operating margins.
Beyond the boom: Investing in demographics
Investing is for the long-term, and it’s important not to be distracted by the coming and going of trends. Thinking beyond AI, one of the clearest opportunities for investors is in the Healthcare sector. According to estimates by the United Nations, the global population aged over 60 is projected to more than double to around 2.1 billion by 2050. The implications of this are vast.
One of the most significant implications is the impact such an increase will have on healthcare expenditure, which is likely to rise sharply.. This is well evidenced by the US, where healthcare spending for those aged 65 and over is nearly three times higher than it is for working-age adults. Businesses that can deliver improved outcomes for patients and payers alike offer an opportunity for long-term growth.
Intuitive Surgical, a medical technology company headquartered in Sunnyvale, California, is one such business. Intuitive makes robots that can assist in soft-tissue surgery, whose innovative technology can deliver positive outcomes for all stakeholders by minimising patient recovery time, reducing surgeon fatigue and eliminating mistakes. All of which help to lower the overall cost of treatment. Despite strong growth from the business, the penetration of its machines is low, and we believe that the company has an almost uniquely strong competitive position, with its 20-year head start on competitors giving it a very large installed base, and close to 100% market share.
Important information: This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.
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