Investing in US Growth Markets Beyond AI

Investors have narrowly focused on a single growth theme in US markets: AI. In reality, the US has many pockets of structural growth, which can bring opportunities for those investing in North American equities. Demographic shifts and innovation are supporting the healthcare sector, for example, while supply chain changes are supporting a range of industrial companies. Decarbonisation is an important source of growth. There are also clear opportunities in AI beyond the narrow range of infrastructure companies that have led the pack to date.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Investors have focused on a handful of communication and technology investments¹ when investing for growth in the US market. AI technology companies have been an obvious choice at a time when investors were nervous about the outcome for the US economy. But with a soft landing for the US economy increasingly likely, there is evidence that investors are starting to broaden their focus, and look to other, fresher growth themes in the US market.

Emerging opportunities in US healthcare

The US healthcare sector has been supported by long-term demographic trends. Ageing populations around the world have created additional demand for medicines, while rising costs facilitates a need for increased efficiency within the healthcare ecosystem.² The number of Americans ages 65 and older is projected to increase from 58 million in 2022 to 82 million by 2050³ and for many European countries, populations are ageing even faster.

There is also significant innovation in the healthcare sector. Breakthrough drugs on obesity, cancer and gene therapy could be a game-changer for a number of the pharmaceutical giants. In 2023, GLP1 drugs, designed to tackle obesity and diabetes, proved to be blockbusters, and the growth prospects for some of those new products remain very strong.

Supply chain restructure can be beneficial to investors

Supply chain disruption during the pandemic, combined with mounting geopolitical tensions has led many companies to review and re-engineer their supply chains. A recent survey by McKinsey found that almost two-thirds (64%) of respondents are currently regionalising their supply chains, up from 44% last year.⁴ It is a phenomenon we see across the companies in which we invest.

This 'near-shoring' takes different forms. Some will be bringing manufacturing back to the US, while others will look for skilled manufacturing options in friendly neighbouring countries such as Mexico. Either way, it is bringing new opportunities for US businesses. Our preferred exposures are through technology hardware, storage and peripherals and communications equipment companies, where we find beneficiaries of this trend.

The energy transition still relies on natural resources

Our focus on sustainability places a high hurdle for energy companies to be included in the portfolio, but traditional oil and gas operators are critical in the energy transition towards less carbon intensive sources. At the same time, demand for energy continues to rise: AI is energy-intensive and requires the build-out of new data centres to support it.

As a result, in the portfolio, we hold a number of attractively priced energy operators with good resource assets that have the opportunity to improve upon environmental issues or demonstrate clear leadership in sustainability. This may be through exposure to renewables or commitments to carbon neutral outcomes.

There are other themes that are tangential to AI. To date, a lot of the focus has been on the infrastructure of AI, rather than the usage of it. We believe companies with large, proprietary data sets will be in a good position to harness AI, and deploy it in their business. This may deliver significant productivity advantages.

Investors do not need to focus narrowly on artificial intelligence to find sources of growth in the US market. In reality, there are a range of structural growth themes, which have been less in the spotlight and where pricing is better as a result.