1. Strong fundamentals
- Solid Financial Health: Today’s market leaders particularly in technology offer high-quality margins, strong free cash flows, and solid balance sheets, making them attractive even in a slowing economy, in our view.
"It is one of the great paradoxes of the stock market that what seems expensive and too high usually continues to go higher and what seems cheap and too low usually continues to go lower."
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William O'Neil, Founder of Investor’s Business Daily & CAN SLIM (1933–2023) |
- Profit Growth: Analysts project strong growth ahead for global quality stocks, particularly in artificial-intelligence related tech stocks in the upcoming quarters. The robust fundamentals for quality stocks results from best-in-class business models and market dominance.
Note, this is under our current view of a slowing global economic growth and should there be a recession we would expect most stocks to suffer due to weaker earnings and less liquidity in the market.
1. Structural growth drivers
- Tech Sector Leadership: The tech sector, particularly companies at the forefront of the AI revolution, represents a significant growth opportunity. Tech valuations have become attractive again, with global tech benchmarks having declined by around 10% from their recent peaks, offering investors another entry point in our view.
- Global Quality Leaders: Beyond tech, we see opportunities in Europe’s Quality stocks from Luxury to Pharmaceuticals, as well as large Industrial conglomerates each having their own structural drivers. For healthcare these include the rise of weight-loss drugs, and generally companies exposed to the aging population theme.
- AI Boom: With artificial intelligence driving future growth, significant investments in AI technologies by leading companies underscore the sector's long-term potential. As Alphabet CEO Sundar Pichai recently said “the risk of underinvesting is dramatically greater than the risk of overinvesting for us here.”
In our view the AI infrastructure build is here to stay, and it is a multi-year theme that should massively drive demand for data and those elements in the value chain from commodities to software.
2. Resilient performance amid economic uncertainty
- Moderating Global Growth: Economic momentum is slowing, creating a challenging environment for many businesses.
- Political Uncertainty: With heightened political tensions, particularly in the run-up to the US election, market volatility could potentially remain elevated.
- Volatility Shield: Quality stocks, characterized by strong competitive positions, healthy balance sheets, and resilient earnings streams, are well-positioned to weather these uncertainties.
- Track Record: Historically, quality growth stocks have performed well during the later stages of the business cycle and in periods of economic contraction.
For illustration below, MSCI’s Global Quality Style Index versus the main benchmark, in last 10 years (total returns, USD, based on 100).