Five Great Themes for Long-Term Equity Investors

Nelson Yu:

Headlines might suggest that there’s a lot of risk in the world, but for a long-term investor, there’s also a lot of opportunity. [Here are] five things that you can think about.

First, capital discipline is going to be so important. The cost of capital is rising. Already what we’ve seen is that less than half the companies are able to generate returns above that cost of capital. You need to find companies that can reinvest at profitable rates.

AI is another great opportunity. So far, we’ve only seen the enablers of AI make big returns in the equity markets. [There are] so many beneficiaries from AI in terms of the productivity they can drive. We need to find companies that can properly deploy their technology.

Supply chain reconfiguration is another big theme. Deglobalization leads us to look for more supply chain security and also onshore manufacturing. That’s going to require a lot of capital investment in the future.

Another opportunity is looking at the enablers of energy transition. There’s a demand for long-term reinvestment in our energy infrastructure. We need to find companies that can build out the energy grid, that can innovate in resource efficiency and provide electrification to unlock growth demands for the world.

And finally, remember the regional reform stories. Look at what’s happening in Japan. They’re going through a corporate reform to raise the return on invested capital across companies. That’s having an upward effect on the quality of companies that you can invest in Japan. In Europe, you’ve also got fiscal stimulus based off the long underinvestment that those countries have provided. That has actually driven equity markets higher, but we think that this could be a long-term trend in economic growth.