There’s a new reality taking shape that could define global markets over the next decade. We believe markets are undergoing significant changes and investors may need to reset expectations in this new environment. 
As long-term active investors, we examine those enduring themes that illustrate why it is an exciting time to be an investor, and where opportunity can still be found even during periods of uncertainty.
Dividend decade
Today, boring is beautiful and with growth slowing and the cost of capital rising we expect dividends to be a more significant and stable contributor to total return going forward.
We’re always looking for businesses with pricing power and the capability to grow earnings and dividends at a sustainable level. Those companies have the potential to be compelling investments, especially when markets are volatile.
We are currently finding many opportunities across sectors, including industrials, utilities and health care.
New growth
Growth stocks have come under intense pressure, but for some companies the market is throwing the baby out with the bathwater. It’s essential to differentiate between companies that have reached the end of their runway or are facing stiffer competition with those that are simply in a cyclical slowdown.
If you can find companies set to re-accelerate when the economy improves, you may find promising buying opportunities.
Global champions
It may seem like a challenging time to be a global investor, but this can be when the best companies shine. Investors are concerned about de-globalisation and assume it is negative for portfolios.
It can be, but changes in trade patterns generally favour global champions — or industry-leading multinationals – that can adjust to the changing landscape.
Golden age of healthcare
Innovation is at an all-time high in healthcare. The macro environment may have topped investor concerns over the past year, but innovation is what ultimately drives long-term value creation and we are seeing this with investment in drug discovery and gene sequencing.
Industrial renaissance
Capital expenditure is on the rise, and it could be setting the stage for an industrial renaissance. Record-breaking cash flow over the past 12 months has left oil producers with some of the strongest balance sheets in history.
When energy companies profit, they typically expand exploration and production, which requires more machinery and services.
Reshoring supply chains
Challenged by supply chain disruptions during the pandemic, many companies are taking steps to diversify their manufacturing operations — placing a renewed focus on reliability and security over cost and efficiency. Southeast Asia, Mexico, India and the United States are some of the top relocation destinations.
Companies that facilitate this transition — such as Japanese automation enablers or real estate investment trusts in India — may be well-positioned to take advantage of this trend.
Core strength
Strong income opportunities and a potential economic slowdown could make core bonds the star of a well-diversified portfolio. While slowing growth may be a headwind for many asset classes, for core bonds, it is nirvana.
Alongside declining inflation, higher yields and a US Federal Reserve nearing the end of its hiking cycle, this creates a fantastic environment for core bond funds to generate mid-single-digit total returns and, once again, provide ballast to a portfolio.
Credit comeback
Credit fundamentals may soon be back in the driver’s seat as inflation cools and rate hikes slow. While consistent cash flows and strong balance sheets are always important, they become essential during periods of falling growth when corporate bonds are often impacted unevenly across industries and asset classes.
Selective high yield
At today’s yields, high-yield bonds can provide attractive income to an investor’s portfolio. Yields in the range of 8% help provide a buffer against bond market volatility, so the likelihood of earning a positive return is higher.
Historically, when high-yield bonds yielded in the 7% to 8% range, the average two-year annualised forward return was 9.2% and the average three-year annualised forward return was 7.9%.
Yields have also jumped for high-yield municipal bonds, whose tax-exempt status add to their allure.
Revisiting 60/40
Despite the poor 2022, the concept of a well-balanced portfolio is alive and well. Traditional asset allocation is not a broken or failed strategy. It will always make sense to think about balance, diversification and risk.
A one-size-fits-all approach does not work for every investor. It’s about building portfolios from the bottom up that align with their goals.
Since the start of the year, investment markets have already had to content with a number of headwinds, whether that be persistent inflation or the crisis in the European banking sector.
However, in the context of these key investment themes, we remain optimistic that we can uncover companies that can continue to add value.
Julie Dickson is investment director at Capital Group. The views expressed above should not be taken as investment advice.