by Rob Lovelace, Equity Portfolio Manager and Chair, Capital International, Inc.
As we enter the midpoint of the decade, investors are asking many of the same questions they did at the start of the 2020s. Can U.S. equities continue their long winning streak? What are the catalysts needed to boost international markets? How will changes in global trade and tariffs affect companies and the economy? And what does it all mean for your portfolio?
In this wide-ranging Q&A, Rob Lovelace, veteran portfolio manager and former president of Capital Group, offers his view on where markets are headed, how tariffs could impact the global economy, and select investment themes driving his portfolio decisions.
What’s your outlook for global equities in 2025 and beyond?
As an investor with 40 years of experience, for most of my career, there was always this idea of a duality between the U.S. and non-U.S. equity markets. If one did better for a while, it would revert and the other would do better for a while. Those cycles tended to last about 10 to 15 years. With the U.S. clearly standing out as the dominant market for more than a decade, the biggest question on the minds of investors now is: Can it continue?
In my view, the answer is yes. The U.S. still has a lot of interesting tailwinds. That doesn’t mean we won’t see a correction over the next year or two. With U.S. stocks hitting record highs in recent months, a pullback wouldn’t be unusual or unexpected.
But looking out over the next several years, I think the U.S. still has many advantages, including a heathy economy, access to capital, abundant energy supplies and a world-leading technology sector that continues to innovate — thanks in part to strong access to academia — in key areas such as artificial intelligence (AI), e-commerce and social media.
U.S. stocks have far outpaced other regions over the past 10 years
Sources: Capital Group, MSCI, Standard & Poor's. As of December 31, 2024. Past results are not predictive of results in future periods.
While I continue to think the United States has a bright figure, I do believe things are starting to change for the better in many regions. Other countries are catching up. India is seeking to replicate what we’ve done in the U.S., just as China did over the past 30 years. I think Japan is well positioned to drive earnings growth, given its new focus on shareholder-friendly policies as well as its geopolitical importance as a strong U.S. ally.
In Europe, even though the economy has been weak, there are companies essential to the major investment themes we’ve seen over the past decade. I would put computer chip equipment-maker ASML in that category, along with airplane manufacturer Airbus, and drugmaker Novo Nordisk, to name a few. So, I expect to see a broadening of market returns over the next few years, and I think there are lots of exciting investment opportunities both inside and outside the U.S.
What impact will higher tariffs have on the global economy?
We were taught in high school that tariffs raise the cost of goods for everyone. So the fact that tariffs are rising around the world tells you that something beyond economics is driving those decisions. To be fair, even in the most open free trade agreements, there are always provisions for tariffs to suppress anti-fair trade actions such as dumping products at below-cost prices. Those tariffs are healthy and necessary — and have been used in all the existing agreements.
What we are seeing now is a move by many countries, led by the U.S., to use tariffs as a political tool to change where companies manufacture products. Everyone agrees that action will lead to higher prices. We will have to wait to see how much manufacturing shifts as a result, as there are long lead times to build new facilities, hire people and shift supply chains. Most companies won’t make those changes unless they believe the current tariffs will be in place for a long time.
Trade barriers: U.S. tariffs have risen sharply in recent years
Sources: Capital Group, Bureau of Economic Analysis, Federal Reserve Bank of St. Louis. As of September 30, 2024. WTO refers to the World Trade Organization. NAFTA refers to the North American Free Trade Agreement. Values are in USD.
That trend is beginning, not ending. We are likely to see more trade barriers in the years ahead. Some are completely justified under any free trade deal and others are politically motivated.
But the important thing for investors to understand is that there will be winners and losers that emerge from these changing global trade patterns. Certain multinational companies will be more adept at adjusting their supply chains and operating in different countries. Others, particularly smaller companies with fewer options, will struggle to keep up.
That’s what we are focusing on as fundamental, bottom-up investors. The global trade environment is obviously changing in a profound way, and it’s not easy to predict in advance how it will play out from a macroeconomic perspective. That’s the founding principle of our New Perspective strategy: Seeking to take advantage of evolving global trade patterns. We focus our efforts on trying to determine which companies will benefit from these changes and which will struggle to adapt. I think that’s where active investment management can make a difference in the years ahead.
How does this new reality fit into The New Geography of Investing?
It fits quite well. Since we first started talking about The New Geography of Investing roughly 10 years ago, the world has continued to evolve in a direction where country-of-domicile is not a good indicator of where companies actually do business. That’s why we prefer to look at where companies get their revenue, rather than where they get their mail. It’s simply a better way of assessing risks and opportunities.
Back in the 1970s and 1980s, it was easy to see that European companies did most of their business in Europe. U.S. companies did most of theirs in the U.S., and so forth. But since then, thereVs been a huge spike in multinational companies doing business throughout the world. So while it’s still true that the majority of revenue for U.S. companies is generated in the U.S., 40% now comes from other places. In Europe, roughly 70% comes from outside the region, especially from the U.S. and China. Japan has gone from 80% domestic to roughly 50/50 today. And there are places like the United Kingdom, where 80% of revenue comes from outside the country. (Based on data from FactSet, as of June 30, 2024.)
It’s important for investors to remember that non-U.S. companies are taking advantage of opportunities inside the U.S. Many of the pharmaceutical, engineering and IT companies based in Europe generate a large portion of their revenue from the U.S. So, country of domicile is generally no longer useful in determining where to invest. It’s useful to think about where economies are strong, but as we move into investing it requires a deeper level of analysis to see the whole picture.
What other investment themes do you find compelling?
The rapid advancements in AI applications that we’ve seen over the past two years are remarkable and, in my view, they are going to have a substantial impact on many types of companies, not just the technology sector.
In the pharmaceuticals sector, for instance, they are already using AI to hasten the development of drug manufacturing, allowing scientists to work more efficiently on everything from drug discovery to clinical trials. It can even write some of the highly technical documentation needed when new drugs are submitted for regulatory approval.
Investors tend to underestimate the long-term impact of new technology
Sources: Morgan Stanley AI Guidebook: Fourth Edition, January 23, 2024; Next Move Strategy Consulting, Statista. Initial forecast dates were February 1996 for PC and internet users; January 2010 for smartphone shipments; March 2017 for cloud revenue; and January 2023 for AI market size. Values are in USD.
Currently only about 10% of drug discovery actually leads to viable new drugs, according to the National Institutes of Health. If that number can rise to 20%, assisted by artificial intelligence, that is an example of AI at its highest and best use. It is speeding up innovation, not replacing doctors, and it could double their hit rate over the next few years.
Anyone who doubts the potential for AI to transform entire industries should look at what’s happening in the pharmaceutical sector. This is just one industry, and we are only in the beginning stages. This will play out over the next three decades and has the potential to dramatically accelerate change and innovation across the board.
Do you have a parting message for investors?
The key message, as always, is to stay invested. The biggest mistake investors make is moving to the sidelines when they are worried about election results or geopolitical events or volatility in the markets. It leads them to take short-term views that can be detrimental to their investment results. We are trying to solve a long-term challenge here, relative to saving for retirement, so that’s why “stay invested” is always my parting line.
Rob Lovelace is an equity portfolio manager and chair of Capital International, Inc. He has 39 years of investment industry experience (as of 12/31/2024). He holds a bachelor’s degree in mineral economics from Princeton. He also holds the Chartered Financial Analyst® designation.
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