Thought of the day
The US’s oldest major stock index, the Dow Jones Industrial Average, will be reshuffled today, a move sparked by Apple's stock split. Three of its long-standing members, the oil giant Exxon, the industrial conglomerate Raytheon Technologies, and the pharmaceutical firm Pfizer will be removed from the index. To replace these three stocks, the cloud services provider Salesforce, industrial conglomerate Honeywell, and the biotech firm Amgen will be added to the index.
The shift in the index is not as relevant to investors as it was in the past, as most portfolios now use the S&P 500 as a benchmark, given its broader range. But in our view, the shuffle highlights the importance of diversification in ensuring that investors are well exposed to the winners in a post-COVID-19 world. It also underscores the need for investors to consider rebalancing their own portfolios and shifting from more expensive areas into cheaper ones that may be well-placed to lead the next move up in stocks—particularly now that major indexes such as the S&P 500, the Nasdaq, and the MSCI ACWI are at record highs. Here are four areas where we see longer-term winners:
- Renewable energy. Exxon Mobil was the oldest current member of the index, and soon Chevron will be the only energy company left on the Dow. But global energy needs are expected to grow by 30% between today and 2040, according to the International Energy Agency. Increasing energy demand from urbanization, population growth, and lower costs will benefit renewable energy—the area will represent around 80% of the entire share of investments in power generating capacity from today to 2050, according to Bloomberg. For more on buying into the green recovery, click here.
- Tech disruption. Even though certain areas in tech are more expensive, and the sector's weighting in the Dow will be reduced due to the move, the sector is exposed to secular trends. We think thematic investing along technology disruption lines should outperform standard benchmarks in the medium to long term. Among technology disruptors, we like platform companies with network effects and accelerating market share gain prospects. Among technology enablers, we favor companies exposed to trends like cloud, Big Data, and artificial intelligence (AI). For more on investing in trends boosted by COVID-19, click here.
- 5G opportunity. 5G connection offers 20x faster speed and 90% lower latency than 4G, enabling a multitude of emerging technologies over the next decade. In addition, we anticipate the technology conflict between the US and China will lead to a bifurcated market, increasing overall investment needs and thus benefiting companies in the industry. We expect a 20x rise in annual 5G capex spending to USD 150bn in 2025, from USD 7.5bn in 2019.
- Healthtech. The healthcare industry generates 5% of the world's data, yet remains one of the world's least digitalized industries. Healthcare data is estimated to reach 2.2 zettabytes in 2020 and 23 zettabytes by 2030. Over the next decade, we expect a set of data-driven technologies, such as robotic surgery and artificial intelligence-assisted diagnostic imaging, to make healthcare more effective, efficient, and accessible. We also see opportunity in genetic therapies which could revolutionize the way we deliver healthcare. For more on profiting from advances in healthcare, click here.
So we continue to recommend that investors diversify their portfolios to position for the upside in equities, buy into themes accelerated by COVID-19 or related to the green recovery, and profit from advances in healthcare.
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