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Wealth
Four experts point to the best investment ideas in today’s global markets.
By Suzanne Woolley
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It’s tough to know where to turn in this unsettled market.
Mixed economic data has renewed recession talk. Tech stocks have been hit as investors question the massive capital spending on AI. There’s a contentious US presidential election looming, and a host of geopolitical conflicts are playing out around the world.
As uncomfortable as the volatility feels, though, it can bring opportunity. Four wealth managers sharing timely investment ideas with Bloomberg News see plenty of promise in infrastructure plays, small- and mid-cap stocks, hard-hit health-care companies and, yes, some derivative beneficiaries of all that AI spending.
When the investment professionals were asked how they’d deploy $1 million based on a personal passion, one theme stood out — a desire to get off dry land. Two people chose boating adventures, one in the Mediterranean and the other around the Greek isles. A third said they would build out their weekly boat race on the Delaware River into a larger program. A fourth wealth manager mentioned a view of water — for a writing retreat he’d create, possibly on Martha’s Vineyard.
Read more: Are You Rich?
Bank on a broadening out
The idea: Our view has been that with resilient earnings and decelerating inflation, we’d see a broadening out of earnings growth, and so we’ve recommended exposure to the S&P Equal Weighted Index (SPW) and to profitable small- and mid-cap shares via the S&P Midcap 400 and S&P Small-Cap 600. Even after the recent selloff in global equities, we think it more likely that recent soft data is a seasonal slow patch and not the start of a recession. As the market continues to evaluate the capital expenditure spend on AI, we believe certain sectors, such as industrials, which are well represented in mid-cap stocks, will be beneficiaries of the continued flow of capital to build out AI infrastructure and invest more broadly in required energy sources.
The strategy: Key drivers in the broadening-out theme are that we have visibility into rate cuts and the Federal Reserve’s trajectory, with inflation coming down, the market pricing over 25 basis points of cuts in September and over $6 trillion in money market funds on the sidelines. Also, earnings troughed in 2023, and we now see a path to 10 out of 11 sectors delivering earnings growth by the end of this year.
Higher interest rates were obviously something that kept a lot of capital away from small caps and mid caps. But now, with a clearer trajectory, we believe that this will continue to benefit the companies. We’re differentiating in our exposure in that it’s not as simple as “go long the Russell 2000.” The next leg requires reaffirmation of a soft landing (and not a hard landing), which is why we are focusing on profitable small- and mid-cap shares.
The big picture: We’ve been reiterating to investors to keep in mind that policy not politics drive markets. There have been uncomfortable moves in the market lately, and we’ve also seen some of the strong election positioning starting to fade post the announcement of President Joe Biden’s decision to leave the race. While we could see continued volatility over the next two to three months, we also see a possibility for a year-end rally, which is typical in election years. The macro backdrop is supportive across payrolls, the consumer price index and Fed policy.
Alternate idea
When given the opportunity, I will always choose traveling. I studied and worked in Spain when I was younger and have always felt a strong affinity for the country and the culture. My family and I recently spent a couple of days in Menorca, one of Spain’s Balearic Islands off the coast of Barcelona. It is an amazing paradise with perfect weather, crystal-clear water, incredible food and really kind people. With $1 million to spend, I’d use that as a launch point to embark on a boating adventure around the Mediterranean with a stop in Sardinia, where I have a dear friend I’ve been promising to visit for decades.
Play infrastructure upgrades
The idea: A theme we’re pursuing is around the modernization of US infrastructure. There is an enormous infrastructure investment gap. The most glaringly obvious area is the US electrical grid. The population has doubled since the 1960s, but a lot of major infrastructure systems were built and designed in that era or shortly after. A lot of these systems are inadequate for what’s coming in the next 10 years. AI and data center builds are a huge part, but this theme also captures onshoring and nearshoring trends for manufacturing as well as funds already earmarked for upgrading roads, highways and bridges.
The strategy: Look to electrical equipment products and services: transformers, switch gear components and connectors, microgrids, anything critical to developing/transmitting power more reliably or efficiently. For us, a company doesn’t have to be 100% exposed to AI — it may only be 20% of their business. We like paying a cheaper multiple for growth versus a pure play, but we have to love the other pieces of the company.
Potential key beneficiaries of the need for power that runs more than 90% of the time — and from what could be an increase in power prices as consumption grows — would be unregulated independent power producers operating in deregulated states. In part, what will be highlighted is the value of companies that own nuclear power plants. Despite the chatter about building small modular reactors, we don’t see the feasibility or willingness to build new nuclear plants. Large-scale data centers place a lot of value on power that’s reliable, carbon-free, directly accessible and that doesn’t even really hit the grid.
Both natural gas infrastructure and transmission are also important because there’s a hole to fill in having adequate power supply, even with wind and solar projects coming on. In some cases, even regulated utilities that own transmission and natural gas infrastructure — midstream pipelines that can move gas from A to B — would be beneficiaries.
We have specific quality criteria. The durability and resiliency of the profit model matters, as well as scale advantages and pricing power. We’re looking for long-term compounding power. The S&P 500 has compounded north of around 9% long term, but if you can compound at a little less than 15% that doubles your money every five years.
The big picture: We don’t know which administration will be in the White House next, but whether it’s Donald Trump or Kamala Harris, the trend toward more fraught trade and geopolitical relations with China only augments the importance of modernizing US infrastructure to support US manufacturing and productivity gains.
Alternate idea
I’d give the money to my wife, who writes fiction, as a down payment on a rural property to serve as the perfect writing retreat. It would be for her to finish her second novel but also for a retreat for younger artists and writers. Ideally, it would be in Kentucky, where my wife grew up, or Chilmark, Massachusetts, on Martha’s Vineyard, preferably with a view of the ocean, because we’ve been visiting there since we were teens. A place that’s unplugged, no phones, a more back-to-basics simplicity to inspire the next generation but also maybe import some of our favorite writers and academics.
Focus on underperformers
The idea: We’re more conservative investors in terms of risk, and we want a very diversified portfolio overall. We want some allocation to fixed income; a little bit of alternatives with something like covered calls; and some allocation to market neutral return strategies where you’re just trying to perform a certain percentage over cash and not take a bunch of risk on the market. In the equity market, we think you need to look at some specific sectors that have underperformed the last couple of years.
The strategy: We’re trimming back some of the big tech names, like we’d do with any stock that has outperformed the market, and looking at areas that will come back when the market broadens out. We continue to look for areas of the market that are slightly more defensive in nature – staples, health care, utilities. With the continued volatility as we approach what are historically difficult months for the markets, upcoming elections and increasing geopolitical events that could impact the markets, we’d focus on high-quality names with strong balance sheets and consistency of earnings.
Health care is a hard-hit area, and there are names in the sector like Cigna with strong balance sheets. When you think about regulation, financials and health care come up. If we have an administration with less regulation, then health care should benefit. You also have the benefit of the big weight-loss drugs and all of the innovation around making oral pills instead of injections — you could have more of a secular theme around that.
The big picture: With big tech, our CEO Bob Doll always says, “Don’t get greedy, take a little off the table.” The rotation we’ve seen over the last couple of weeks is evidence of why managing in this way makes sense. You’re able to capture the upside and have arrows in your quiver to take advantage of new areas in the market showing promise. By looking at areas that have been hard hit we’re not trying to add a tremendous amount of risk to a portfolio — we’re trying to add alpha with the least amount of risk possible.
We’ve been cautious with our clients due to the red flags that a soft landing is not a done deal and a larger pullback could be expected. The Aug. 2 payrolls report was the culmination of many signs that the labor market is weakening, wages are stagnating and consumers across the income spectrum are pulling back on purchases.
Alternate idea
Experiences mean the most to me, so if someone gave me $1 million and said you can’t give it to charity, I’d pack my bags and take my kids and off we’d go. I’d book a yacht and the Greek isles would be my first stop, because it’s on my bucket list. And the Amalfi Coast. Then I’d go on a safari in Africa and see Victoria Falls. It’s not just that traveling is fun, but I truly feel that in our country and around the world, we’ve lost so much of the ability to see things from other people’s perspectives and it causes so much of the craziness in this world.
Consider small-caps
The idea: For someone with an established investment portfolio, the next million could go into small-cap US companies. Small caps have underperformed for a long time relative to large caps, and lot of that stemmed from the excitement around the AI wave. But with innovation cycles, the impact is often more broadly felt than initially believed. The innovators get the hype at the front end, but later in the cycle there’s a period of realization where a lot of companies take that new technology and implement it for the betterment of their business. We believe that small caps — and the rest of the investment landscape in the US — is likely to reap a good amount of the benefits from the AI wave.
The strategy: US small-cap stocks are expected to deliver better earnings growth relative to US large-cap stocks as we enter the back half of this year. The stocks are more economically sensitive than large-cap stocks, however, so these expectations are not without risk.
One reason small caps underperformed over the past couple of years is that they’re more exposed to higher interest rates, since half of the borrowing for small-cap stocks is done on a floating-rate basis. Looking out over the next two years, the Fed will be in rate-cutting mode and that should benefit smaller companies. With small caps, we have a tendency to prefer active fund managers because it’s a really large universe.
The big picture: There’s been an upward move recently, but the magnitude of the catch-up left on the table is still pretty substantial. Rate cuts should be a benefit to small caps as their floating-rate debt reprices at lower yields, and that will be a tailwind to earnings. We could see that as early as the fourth quarter of this year.
Alternate idea
In the post-Covid period, I’ve come to realize that interacting with friends, family and community has by far been the most rewarding thing I’ve done. Every week, I race a woefully small sailboat on the Delaware River — six of us own a 22-foot sailboat that’s manned by two people. With $500,000, you could buy 10 to 15 boats — the boat we own can be bought new for $30,000. Then you could build a program to organize races on a regular basis, with two to three people per boat, that could be sustained for five to 10 years. You connect with people on something that has nothing to do with the rest of your life and your work, which is kind of a nice escape.