Have we seen the best of China growth in 2021?
Many European companies have benefitted from the faster economic recovery in China to date, but how long will it continue?
Opportunity has sprung from the Covid-19 adversity
Does the path to freedom signify an economic boom?
Time for a new value/growth investment approach
Is value judgement still relevant in economic recoveries?
Why investors need to be ‘humble’ about making inflation predictions in H2
The journey to higher inflation
SELECT AN IMAGE FOR DETAILS
The World in 2030
Predictions for long-term investors
This isn’t science fiction
Life-changing innovations and their investment potential
Exploring some of the next decade's key investment prospects
Why the future is a lot closer than you might imagine – investment opportunities today
Capital Group on the benefits of long-term investing
Brought to you by
A new article will appear here soon
Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
FOR FINANCIAL PROFESSIONALS ONLY
This material is a marketing communication
Read more from Capital Group
Contact Capital Group
Why businesses that tend to pay higher dividends could see their prospects improve as economies reopen
Are global dividends making a comeback?
CLOSE VIDEO X
For investors seeking resilience, a long-term investment in bonds still makes sense
Reasons to not give up on fixed income
This material, issued by Capital International Management Company Sàrl (“CIMC”), 37A avenue J.F. Kennedy,
L-1855 Luxembourg, is distributed for information purposes only. CIMC is regulated by the Commission de
Surveillance du Secteur Financier (“CSSF” – Financial Regulator of Luxembourg) and is a subsidiary of the Capital Group Companies, Inc. (Capital Group), also authorised and regulated in the UK by the Financial Conduct Authority.
© 2021 Capital Group. All rights reserved.
Technology innovation over the next decade
Why the semiconductor super cycle could power the next decade of growth
Inflation uncertainties after July’s blip
Long-term economic dislocation or a temporary market check?
If the 2010s was an era for technology titans, the 2020s may see health care take the lead
Are modern medical ‘miracles’ set to advance health care investment trends?
Inflation is set to head higher after July’s blip
Innovation springs from adversity, and the Covid-19 crisis is no exception. But to what extent is the world really changing when it comes to investment opportunities?
As we emerge from the dark days of the Covid-19 health crisis, the global economy appears to be on the road to making a significant recovery.
Consumers are cash rich and keen to start spending; and thanks to the rollout of effective vaccines, they now can in most parts of the world.
What’s more, this pent-up demand is underpinned by unprecedented levels of fiscal support over the past year. The International Monetary Fund (IMF), which recently more than doubled its 2021 US GDP growth estimate to 6.4%, are predicting a period of dramatic economic growth as a result.
There are encouraging signs both within and outside of the US, however, with a never-ending supply of interesting and innovative new companies that are positioned to capture growth in new areas. One of these is Southeast-Asia-based Grab, which is planning to go public via a record-breaking special purpose acquisition company (SPAC) merger with NASDAQ listed Altimeter Growth Corp. Though it was recently announced the merger had been delayed to Q4 2021.
“Companies such as Airbnb, which listed in December in the US, and taxi and delivery service Grab show that it is a continuing evolving universe and innovation can generate strong growth prospects,” Carlyle adds.
“When Pearl Harbor happened, the US artillery was 75% horse drawn. By the end of the war, they had entered the atomic age”
Back to Home
Martin Romo, Equity Portfolio Manager and Research Director at Capital Group
“Ten years from now, I think we will look back on Covid as our generation’s ‘Pearl Harbor moment’ – when extreme adversity spurs innovation to address some of the era’s biggest problems,” explains Capital Group equity portfolio manager Martin Romo. “When Pearl Harbor happened, the US artillery was 75% horse drawn. By the end of the war, they had entered the atomic age. Covid-19 could be the trigger that spurs us to tackle critical issues, such as healthcare and education, over the next decade.”
The IMF’s estimate does not mean that investors can necessarily look forward to a decade of positive stock market returns. While the market rebound over the past 12 months has been impressive, coming off a near 30% fall in some markets at the start of the pandemic, if we look at the 10 years to come, it’s difficult to see companies growing their revenue at 3% per annum, says Richard Carlyle, equity investment director at Capital Group.
Equity Portfolio Manager and Research Director at Capital Group
Equity Investment Director at
Equity Portfolio Manager at Capital Group
Chief European Economist at Capital Group
Adversity spurs innovation
Sectors that suffered during the pandemic, such as tourism and leisure, are also among those predicted to reap the rewards of a rebound in consumer spending.
“Our memories are marked by experiences, so I think travel and dining out will come roaring back,” says Capital Group equity portfolio manager Hilda Applbaum.
However, this bounce back has largely been priced into the markets already. Rather than favouring certain sectors, investment success therefore looks likely to hinge on spotting corners of opportunity – and recognising the companies that are exiting the pandemic stronger than they went in.
“We take a selective approach,” says Carlyle. “For example, we prefer companies in the Apple supply chain, such as TSMC and ASML, rather than the company itself.”
“Our memories are marked by experiences, so I think travel and dining out will come roaring back”
Hilda Applbaum, Equity Portfolio Manager at Capital Group
Yet behind the investment opportunities there are the fiscal consequences of Covid-19 to consider, with many governments’ debt-to-GDP at the highest level since World War II.
“The sheer number of workers who now rely on the state, the scale of the bailouts, the skyrocketing deficits and debt all point to how fiscal conservatism has given way to a new paradigm,” says Capital Group’s political economist Talha Khan.
It also means economic growth could be repressed should inflation rise more quickly than expected, though.
Discussing the global macroeconomic environment, chief European economist at Capital Group, Robert Lind comments: “The reopening of economies is likely to trigger a pick-up in inflation… As inflation rises and as growth recovers, we could see some pressure on long-term interest rates.” And he concludes, “However, if we did start to see upward pressure on real interest rates, it would be harder for governments to fund these debt levels.”
The value/growth argument is fast becoming outdated as style rotations become difficult to predict in uncertain and volatile markets. Is it time for a new approach?
Historically a safe bet in times of economic growth, value stocks are enjoying a return to favour – despite years of lacklustre returns.
With tech-heavy growth stocks losing ground, and many of the industries hardest hit by the pandemic now rebounding strongly, received investment wisdom suggested it was value’s chance to shine – particularly as inflation concerns crept into the fold. And for a while value stocks certainly did:
According to Capital Group equity portfolio manager Martin Romo, whether you prefer a value or a growth investment approach, stock selection is always about assessing whether the current price of a security is “fair” relative to future expectations.
While value investing traditionally focuses on stocks that are “cheap” relative to fundamentals such as future earnings estimates, growth investing favours stocks that could produce higher-than-consensus earnings growth.
In other words, the two styles share an interest in evaluating the present value of a company’s future earnings, even though their emphasis on earnings estimates differs.
The development of value and growth as two distinct investment styles is based on historical data showing that periods of high returns for one approach are generally followed by periods in which the other approach is more successful.
“In the 1970s, for example, high-quality growth companies such as Pepsi, Gillette, Disney, Wal-Mart and Polaroid drove the “Nifty-Fifty” bubble and powered returns,” says Capital Group client solutions specialist Nisha Thakrar.
“But when the bubble burst, value outperformed growth, not only in the bear market but across the full downturn–recovery cycle.”
In the economic environment we find ourselves in today, however, style rotations have become more difficult to predict, which raises questions about whether investors can still rely on value stocks rising during periods of economic recovery.
In the US the Russell 1000 Value index steered ahead of the equivalent growth index by
3.3 percentage points in the
six months to 30 June 2021.
Value vs growth
“But when the bubble burst, value outperformed growth, not only in the bear market but across the full downturn–recovery cycle”
Over the last decade, there have been some major secular changes that have increased risks within the value/growth framework.
These include that traditional value companies, such as banks, are facing difficulties that are unlikely to be resolved by a period of economic growth – in this case, tighter regulations and low interest rates.
In addition, value stocks have been hampered by a surge in digitisation and an increase in the importance of intangible assets such as customer loyalty, both of which mean a bottom-up approach is essential to understand a company’s true value.
Greater fluidity between growth and value stocks also means investors who restrict themselves to one style could miss out as a result.
“Take the connected health and fitness industry – where new technologies are beginning to shape every aspect of sport: data, performance and the user experience,” Thakrar says.
“An old economy stock like Nike has transitioned into the new economy, transforming its revenue growth and thus becoming a growth stock.
“This demonstrates that potential future winners can be found in both value and growth.”
The advantages of an “agnostic” approach
In more recent weeks, however, value’s run has seemingly stalled again, with the MSCI World Value index losing 1.34% in the month to 30 June 2021, just as its growth counterpart returned to peak form and delivered a gross monthly return of just under 5%.
Yet before investors take the opportunity to rotate back into growth stocks, there is reason to believe taking such a reductive view of the value/growth argument is in fact becoming outdated in today’s ambiguous economic environment.
Nisha Thakrar, client solutions specialist at Capital Group
“An old economy stock like Nike has transitioned into the new economy, transforming its revenue growth and thus becoming a growth stock”
Client Solutions Specialist at Capital Group
Following the breakneck pace with which Covid-19 vaccines were developed in 2020, innovative advances across the medical sector are creating new investment opportunities for investors
Developing a Covid-19 vaccine in under a year is undeniably an historic achievement for the global pharmaceutical industry.
Take the Pfizer-BioNTech vaccine. First conceived in January 2020 when genetic sequences of the virus were released; by mid-December 2020 it was being used to protect vulnerable members of society from the virus. When you consider it took more than 40 years to develop vaccines for Ebola and chickenpox, it is nothing short of a modern medical miracle.
“It’s no exaggeration to call these Covid-19 vaccines one of the greatest scientific accomplishments in our lifetimes,” says Capital Group equity investment analyst Laura Nelson Carney.
The question now is: can the health care sector produce more ‘miracles’ on this scale making the 2020s the industry’s time to shine?
In an age marked by global competition and rivalry, the Covid-19 vaccine effort was remarkable for the level of collaboration it engendered around the world. US biotech firm Moderna partnered with a division of the US National Institutes of Health to develop a similar vaccine, and UK pharmaceutical giant AstraZeneca worked with Oxford University to make its version.
The effort featured the cooperation of a range of companies, governments, and academia, with billions of dollars of upfront government funding allowing companies to implement many steps in parallel that they would normally do in sequence. At a broader level, the lightning speed with which Covid-19 vaccines were developed has shown what the health care sector can achieve.
And while we might not see the same level of government spending on such innovations in the future, Capital Group equity portfolio manager Rich Wolf, believes that advances in areas such as genetic analysis are paving the way for major breakthroughs in the treatment of various types of cancer, as well as massive potential profits for the companies that develop the drugs.
“Therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for the companies that successfully develop them,” he said.
“It’s no exaggeration to call these Covid-19 vaccines one of the greatest scientific accomplishments in our lifetimes”
Covid-19: A global effort
“Therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for the companies that successfully develop them”
Investment implications foreseen by Wolf and his colleague Laura Nelson Carney include a growing role for China – both as an end-user market and as a source of globally relevant innovation.
“We are already experiencing a massive wave of innovation across the health care sector that will drive new opportunity for companies, potentially reduce overall costs and, most importantly, improve outcomes for patients,” says Wolf. “Breakthroughs in diagnostics may lead to earlier detection of illnesses, or in some cases treat disease before it progresses.”
Rich Wolf, equity portfolio manager at Capital Group
Laura Nelson Carney,
Equity Investment Analyst at Capital Group
Laura Nelson Carney, equity investment analyst at Capital Group
Sources: Industry & government data, Kagan estimates, Standard & Poor’s. Data compiled June 2020. Values in USD.
Other chronic conditions
Revenue of remote patient monitoring devices
Wolf uses the example of genetic testing equipment maker Illumina and research and manufacturing company Thermo Fisher Scientific (TFS), which are providing services to a host of drug developers.
“One of the most exciting things is the liquid biopsy, offered by both Illumina and TFS, whereby a sample of your blood can be used to identify cancer at its earliest stages,” he adds, noting that while much of the recent focus on health care innovation has been on the pandemic and vaccine development, Capital Group has also been looking over the horizon, trying to determine how health care will transform itself and how we can invest in those shifts.
“If the 2010s were the era for technology titans (including the FAANGs) to lead markets and change the world, then the 2020s may well be the era when health care takes the lead,” he adds.
Source: Medical miracle: Health care innovation saves the world, Capital Group
The semiconductor industry has evolved from boom-and-bust cycles to become the key that will power technology innovation over the next decade. Capital Group’s Steve Watson reveals the potential of this new investment opportunity
The semiconductor industry is predicted to hit sales of around $1trn in 2030, up from $450bn in 2019.
Used in the manufacture of everything from your smartphone to your fridge, these increasingly ubiquitous chips are already hot property, with the World Semiconductor Trade Statistics organisation’s latest figures showing global sales of $43.6bn in May 2021, an increase of 26.2% year on year.
However, a perfect storm of supply and demand factors, following a surge in demand that is driven by changing consumer habits post-Covid-19, means there is a global semiconductor shortage. Ironically even Samsung, the world’s second-largest producer of chips, was forced to postpone the launch of its high-end smartphone earlier this year due to the shortage.
This is yet more evidence of the robust demand for chips across industries, that is only set to grow. Semiconductors are set to power the next decade of global growth - as much as the oil fuelled industrial economies did in the last century.
Investment Week and Professional Adviser spoke to Steve Watson, equity portfolio manager at Capital Group, to learn how the potential growth of this industry could provide investment opportunities in 2021.
Following several rounds of consolidation, the semiconductor supply chain is now dominated by a few companies.
These highly specialised companies already had a considerable competitive advantage over potential new entrants to the market pre Covid-19, but this has undoubtedly been boosted by the global health crisis.
By essentially forcing great swathes of the planet’s population into a virtual world , Covid-19 restrictions accelerated orders for semiconductors for smartphones, video game devices and home appliances.
As millions of people started working remotely, there was also a surge in demand for the chips used in personal computers, sales of which grew at their highest rate for 10 years in 2020.
The need to make more devices is not the only reason the industry became unable to meet demand, however. As car manufacturers cancelled their orders early in the pandemic, there was no capacity available when they reinstated them later in the year.
Semiconductors are set to power the next decade of global growth - as much as the oil fuelled industrial economies did in the last century
How has the semiconductor industry evolved over the past year?
“In my portfolios, I am interested in companies that may be misunderstood by the market but are working on transformative ideas to change daily life”
Steve Watson, equity portfolio manager at Capital Group
Source: Bloomberg. Data represents the share of all semiconductor device applications in 2025, as forecast by Bloomberg.
Uses for semiconductors (2025 forecast)
PC / Computer
Industrial / Government
Already essential to the manufacture of many possessions, by 2030 semiconductors could be ubiquitous across most consumer touchpoints, from belts to salt cellars.
Corporations, governments, and industries are transitioning to 5G technologies, artificial intelligence (AI) and cloud-based solutions, also there is a growing need for data centres to store the ballooning amount of data we create and consume every day. In my view, this is likely to drive production of even more advanced chips over the next five years.
Their growing omnipresence also makes semiconductors strategically important at a political level, where they are increasingly seen as a national security priority.
Why are semiconductors so integral to the global economy?
Governments in the US and China want to reduce dependence on foreign manufacturers, while in Europe officials are concerned about a lack of manufacturing capabilities that has, for example, hit German car makers during the current shortage. This political interest is evidenced by investment in the industry, such as when the US senate recently approved a $52bn payment to the domestic semiconductor industry. Whether public policy imperatives affect the industry’s efficiency, is a trend we will be closely watching.
From an investment perspective, over the next decade I expect chipmakers could be working overtime to satisfy the robust demand across industries. In my portfolios, I am interested in companies that may be misunderstood by the market but are working on transformative ideas to change daily life.
How will the importance of semiconductors impact on global trade and investment opportunities?
Since it takes about four months to manufacture auto chips, we believe that situation is likely to correct itself by the end of the year. Elsewhere, semiconductor manufacturers are planning to spend billions of dollars on new facilities to meet the demand. For example, Taiwan Semiconductor Manufacturing has earmarked $100bn for new chip fabrication facilities through 2023, while Intel is planning a $20bn investment in two new plants in Arizona.
Does the shortage in semiconductors pose a challenge in the short-to-medium term?
While many are expecting post-pandemic inflation spikes in both the UK and US to be temporary, we talk to Capital Group about the possibility of it becoming a longer-term economic issue for investors globally
The cost of living is going up, with a combination of Covid-19 restrictions, pent-up demand, and ongoing government stimulus pushing the UK inflation rate to 2.5% in June 2021. Although July’s figures saw inflation cool to 2%, it is predicted the dip is unlikely to last and by November the figure could be closer to the Bank of England’s 4% forecast.
The good news is that on both sides of the Atlantic (US inflation hit 5.4% - the biggest year-on-year increase since August 2008) the figures reflect weaker-than-usual inflation this time last year, when much of the economy was out of action. But for investors, the question remains what impact inflation may have on asset classes.
Even though inflation may rise in 2021 again, Capital Group economist Robert Lind believes many of the current price pressures are likely to prove transitory.
“Despite higher prices for some raw materials and consumer products, signs of broader price inflation may be mostly short-term in nature and unlikely to produce sustained, long-term inflationary pressures,” says Lind.
Much of this will of course depend on how global central banks manage the withdrawal of the Covid-19 stimulus programmes underpinning many developed economies now.
But even as economic growth races ahead in many parts of the world – the IMF now expects the US economy to expand by 7% in 2021; while the Bank of England raised its annual growth forecast to an 80-year high of 7.5% in May –expectations for any sudden change in monetary or fiscal stimulus remain muted.
“The recovery has global policymakers on both the fiscal and the monetary side curtailing their Covid-19 stimulus,” explains Capital Group portfolio manager Pramod Atluri. “But for central bankers, in particular, that normalisation process will likely be gradual as they must consider the risk of upsetting the financial market as the recovery unfolds.”
A transitory stage
“The second half of 2021 and beyond is likely to be a more challenging period, but the importance of maintaining a balanced portfolio hasn’t changed”
For inflation watchers, the investment outlook remains murky. Rising inflation can mean investors feel safer with their money in cash or cash-like investments. However, this is not always a favourable investment strategy – as investors in money market funds found earlier this year.
According to Atluri, second quarter cash holdings missed out on positive returns in most bond sectors while taking a hit to purchasing power thanks to higher inflation.
The fund manager suggests taking a long-term perspective rather than reacting to those forecasting big, inflation-led interest rate hikes.
“The second half of 2021 and beyond is likely to be a more challenging period, but the importance of maintaining a balanced portfolio hasn’t changed,” Atluri said.
When it comes to equities, meanwhile, the picture is not all doom and gloom either.
A moderate increase in inflation, especially when economic growth is strong, has been known to reward equity investors. Historical data shows that inflation rates of between 3% and 4% have not prevented the S&P 500 index providing above-average gains in most years since 1946.
Pramod Atluri, portfolio manager at Capital Group
Economist at Capital Group
Portfolio Manager at Capital Group
IMF's prediction of how much the US economy will expand in 2021
The longer-term view
The annual growth forecast of the UK economy by Bank of England - an 80-year high