Invest in Basic Needs

The idea: The consumer staples sector globally has lagged more exciting growth areas such as technology and communications services. Yet staples stocks are defensive, typically generating plenty of cash for shareholders regardless of the economic environment. Many companies in the sector spent the past few years prioritizing debt reduction, making way for the return of future cash to shareholders. The sector’s rising dividends and share buybacks enhance total returns.

The strategy: To balance a tech-heavy portfolio, consumer staples stocks (food, drinks and household products) are must-haves, enjoying steady demand even when wallets tighten. Concentrate on sector leaders with top-three market shares in their various products and markets. Look for companies capable of product quality upgrades. Although costs increase with inflation, innovative companies can boost the level of customer satisfaction and raise prices.

The big picture: With capable management teams combining attractive new products with operational efficiency gains, consumer staples can deliver competitive returns. They don’t need much economic growth and are not dependent on AI spend or cloud conversion – just hunger, thirst and hygiene.

Find Cheap Growth

The idea: Health-care stocks are struggling. Despite last year’s market gain of more than 20%, the sector barely eked out a low single-digit return. Longer-term relative performance looks even worse. On a five-year time frame the sector’s total return is roughly 35%, approximately half the 70% gain for the MSCI World Index. Given years of underperformance, healthcare has become a market anomaly: a cheap growth sector.

The strategy: The global health-care sector trades at approximately 17 times forward earnings, one of the few sectors to trade below its long-term average. The discount appears even more interesting given the solid earnings outlook. Analysts expect earnings growth of roughly 17%, second only to technology stocks. Earnings are expected to benefit from continued growth in blockbuster drugs. According to JPMorgan, between 2022 and 2030 the market for obesity drugs is expected to grow at a compound annual rate of more than 50%.

The big picture: To be sure, there are headwinds. Apart from uncertainty over drug pricing, investors are ignoring healthcare and other “defensive” sectors in favor of more cyclical stocks. In the short-term this is likely to continue. That said, the sector is reasonably priced with strong tailwinds, not the least of which is higher overall spending driven by an aging population. This suggests an opportunity to buy good long-term growth at a reasonable price, an unusual combination in today’s market.

Buy Bessent’s ‘Three Arrows’

The idea: The decisive election victory by President Donald Trump has provided greater clarity about some of the macro factors likely to drive financial markets through 2025. Rather than focus on tariffs, immigration or cutting back government, we think the investment focus should be on the “three arrows” that President Trump’s pick for Treasury Secretary, Scott Bessent , has outlined. Bessent proposed that the US should commit to 3% real growth in gross domestic product, reducing the government deficit to 3% of GDP and boosting energy production by the equivalent of 3 million barrels per day.

The strategy: Clearly, delivering on these will be tough. But as an indication of what the new administration will want to achieve, it is clear that keeping GDP growth strong will be central to their plans. Given that the economy is already operating above trend, this also suggests some upward pressure on wages and prices.

To offset upward pressures on service sector inflation, lower energy prices will be critical. Some people might have dismissed the “drill-baby-drill” narrative of President Trump during the campaign. But we see increased energy output as being the most critical part of the Bessent “three arrows.” Increased energy production directly boosts economic output, while lower energy prices boosts demand for both companies and households. It might also lead to an improvement in the trade balance.

Within equities we focus on areas that might benefit the most, such as:

• Construction companies, which should get a boost from capital expenditures on new factories built to replace production of tariff-hit imports
• Real estate investment trusts related to the buildout of data centers needed to drive AI growth
• Energy technology companies and service providers that will be critical to increased energy output

The big picture: With expected rate cuts by the Fed and an administration committed to boosting growth and cutting taxes, we expect US corporate earnings to remain strong, which will help support US equities.

Mix Offense and Defense

The idea: We’ve had a very strong period for risk markets. The last couple of years were about offense and our view going into 2025 is that you need both offense and defense in your portfolio. In defense, in the large-cap segment we see opportunities in consumer staples stocks, so food — Kraft Heinz, Nestle, General Mills, for example — and alcoholic beverage companies. We also see opportunities in healthcare. For offense, we like the long-term outlook for quality European stocks as well as emerging markets, and Latin America in particular.

The strategy: The normalization of supply chains and easing of inflation pressure in the medium-term can be positive for food company profit margins. While there is still a lot of uncertainty about how GLP-1 drugs will impact long-term consumption choices, some research suggests the main impact will be more on the weight-loss products and less the snack category.

With alcoholic beverages, consumption patterns have normalized since the boom period when people were staying at home — that adjustment weighed on revenues in the short-term but the market probably overreacted. Healthcare is an area that saw some weakness in 2024’s fourth quarter, but has relatively high growth and quality growth. Our equity analysts are mainly focused on the medical devices and instruments category.

For offense, some European quality stocks have been impacted by concerns about Chinese growth but we like the long-term outlook, and luxury goods companies like Richemont or LVMH are examples of companies we’d like. The other area we’re starting to put money behind is emerging markets, and Mexico and Brazil specifically. If you look at the underlying profile of Mexican stocks, about 40% of the index is in consumer staples and communication services companies with steady cash flow and strong balance sheets. This area has been largely overlooked by investors.

The big picture: Investors have to be more selective than in previous years because of valuations. If you look at US equities, or investment-grade credit or high-yield bonds, you’ve very much seen a decrease in risk premia over the past 12 months. In some areas we feel like we’re not being compensated for all that risk.