Andrew Van Sickle: Healthcare is a broad term. Could you start by outlining what exactly is in the MSCI World Healthcare index, the benchmark for your fund?

Sven Borho is the co-founder and managing partner of OrbiMed, and portfolio manager of the Worldwide Healthcare Trust.

Sven Borho: It captures every single part of the industry. You have the big pharmaceutical groups; more innovative smaller-cap pharma and biotechnology firms; generic drugmakers; medical-device makers; and service providers. These are the big health-management organisations (HMOs) in the US (the health insurers) and private hospitals. The index is diversified across the US, Europe and Japan, although it doesn't capture healthcare in emerging markets.

Andrew Van Sickle: It's often said that “health is wealth”, and investors have traditionally been able to count on both structural growth and income in this sector. But the index has had a difficult decade. What has gone wrong?

Sven Borho: One problem is that the price of pharmaceuticals became a political football, creating years of uncertainty. Drug prices were a key theme in the presidential election between Hillary Clinton and Donald Trump. We got a form of drug-price controls under Joe Biden, and the regime was tightened when Donald Trump returned to power.

The other key headwind was the rise in interest rates over the past few years. That hampers growth stocks, such as smaller biotechs, as dearer money reduces the present value of future profits. The S&P Biotechnology Select Industry index went nowhere between mid-2015 and mid-2025. The S&P Health Care Select Sector index gained 60% over that period, compared with 300% for the S&P 500 or 400% for the Nasdaq.

Andrew Van Sickle: Is the drug-price threat receding now?

Sven Borho: Yes, the sector knows where it stands now, so the uncertainty discount has started to recede. Trump was irritated that US drug prices were higher than elsewhere. He has now cut a deal with the sector, whereby the government will pay lower prices for future drugs and for current ones being delivered to Medicaid and Medicare programmes. The deal is being done with most-favoured nation (MFN) pricing, whereby prices will match those offered to a basket of other developed countries.

Meanwhile, mergers and acquisitions (M&A) are on the rise as big companies try to compensate for major drugs going off patent. When a drug reaches that stage, prices collapse by 98% as generic competition takes its toll. Merck's Keytruda, for instance, a cancer drug with annual sales of $30 billion, goes off patent in 2028. Each of the Big Pharma companies will see a large product go off patent between 2025 and 2028. This coincides with the Trump government's pricing deal, so the sector is facing a double whammy.

History shows it is impossible to rectify a pipeline gap like this through internal research and development (R&D) alone. So the big names will go shopping, acquiring the right to develop a drug from smaller firms with promising products, or buying them outright.

Big Pharma wants products with annual sales potential of $3 billion and above. If you're a speciality pharma firm or a biotech with a drug boasting that kind of potential, you're on someone's shopping list. That is why 30% of our portfolio is in biotech companies, with a heavy focus on those most likely to be bought out. Overall, 12% of the portfolio comprises a “basket” of the stocks most likely to be bought out.

Andrew Van Sickle: Returning briefly to drug development, what proportion of drugs successfully move from discovery to approval?

Sven Borho: The percentage hasn't changed much over the years: one in ten make it from pre-clinical trials through to regulatory approval. This is the biggest bottleneck in the sector. One can't speed up the process, which takes ten, even 15 years. Patients need to be on a drug for a certain amount of time, for instance.

And costs have risen sharply. Traditionally, it would cost around $1 billion to bring a drug to market. These days, it's north of $2 billion. Getting one person enrolled in a clinical trial can cost $300,000. Compliance and regulatory requirements, along with the general inflation trend, have driven up expenses.

Andrew Van Sickle: What effect could AI have on the sector?

Sven Borho: It is likely to help us come up with more compounds to test, but that will just add more potential treatments to the bottleneck building up before the clinical testing process. It is in the areas of diagnosis and treatment of disease that AI will be transformative. Given how it can amalgamate data – including your blood tests and MRI scans, say – and compare new information to it, it should become far better than a GP at diagnosing and treating disease. It may not be too long before people don't see a GP at all.

This should massively reduce costs – as should robots performing surgery. I think manual surgery will be a thing of the past in the not-too-distant future. Already today, you could have a physician operating in London on a patient in New York with a medical robot. One of our favourite companies, therefore, is Intuitive Surgical, which manufactures robotic surgeons.

AI should allow us to get a grip on healthcare expenditure; 12% of total healthcare spending (which in the US comprises a fifth of GDP) is on drugs, a proportion that hasn't changed over the years. Hospitals, surgeries, GPs and so on account for the rest. There should now be deflation in that 88%, counteracting the expense of the ageing of the population.

Andrew Van Sickle: What impact will weight-loss drugs have?

Sven Borho: People tend to think of the cosmetic element, and of course that spurred early adoption, but the big story is the impact on chronic diseases linked to excess weight, notably the big ones: cardiovascular disease, cancer and diabetes. Data suggests these treatments cut your chance of contracting Type-2 diabetes by 80%.

There are spillover effects in other areas – sleep apnea, for instance, or hip and knee surgeries, the odds of which dwindle if you are walking around with 20% less body weight. The next stage of the boom will be increasingly common oral treatments rather than injectables, with Eli Lilly the leader in the subsector. Weight-loss is a thriving division for other big names, but for me the most interesting way to play weight-loss drugs is Structure Therapeutics.

It focuses on oral treatments for obesity and related diseases. It has an oral obesity treatment about to enter phase III (the final stage of clinical trials) and it is second only to Eli Lilly's. It should hit the market a year after the pharma giant's treatment (which is supposed to arrive this month). The group will probably be acquired. Weight-loss treatments will be the largest drug category for years to come.

Andrew Van Sickle: Tell us about your fund and its top-three holdings?

Sven Borho: We launched it in 1995; I have been in the sector for 35 years. The trusts's net asset value (NAV) enjoyed a compound annual return of 13.5% from the fund's inception until the late spring of 2025, eclipsing the benchmark index's 11.3%. The secret to our success is an enduring focus on innovation – the highest-growth companies. We've always been agnostic about where those companies are, so we are widely geographically diversified. Our overweight position in biotechnology compared with the benchmark again highlights the concentration on innovation.

Eli Lilly, AstraZeneca and Boston Scientific are the top-three beyond our M&A basket. The last is one of the fastest-growing and best-managed medical-devices firms, a long-term compounder with 15% yearly growth in earnings per share. Eli Lilly is a bet on the weight-loss theme. AstraZeneca is the second-fastest growing pharma group in the world, mostly driven by oncology. We like to identify the fast growers, even in the large-cap segment. Intuitive Surgical and Boston Scientific are the fastest-growing medical-technology firms.

It's worth highlighting our holding in China's Jiangsu Hengrui Pharmaceuticals too. It's worth 5% of the portfolio and provides access to the extraordinary innovation in the Chinese pharma sector. Jiangsu has an R&D pipeline of approximately 150 projects, the second-largest in the world after Pfizer's 156. They have a competitive compound in practically every area.

What's more, going from the pre-clinical stage of the pipeline to phase one or two data (the stage at which you receive the first efficacy data in human clinical trials) takes them a third as long as Western companies and costs them 90% less. The scientists doing the work are just as qualified as in the West; many will have done their PhD or worked in a biotech here. Costs of R&D are much lower in China, as is the regulatory burden, especially when it comes to early stage trials.

Once they get to phase three of clinical trials, however, it gets trickier. A Chinese firm can't do those trials in Western markets. It has to licence the drug out to Western counterparts. The US regulator, the Food and Drug Administration, doesn't trust Chinese data, while there are also political sensitivities surrounding the process. As a result, Western firms' heads of R&D go to China to or three times a year to discuss such deals, which can be massive.

That is a transformative theme. At the epicentre is Jiangsu Hengrui. It is the Chinese biopharmaceutical equivalent of Nvidia. It is the biggest innovator. I mentioned that Jiangsu's number of R&D projects in clinical trials is second to Pfizer's, but if you include pre-clinical projects, it has the world's largest pipeline. I think it has another 500 projects. And the quality of its compounds is absolutely first-class.

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The view that utility companies are a safe haven for cautious investors is out of date. Today's market is far more active and complex than it was even five years ago. New regulations and a strong push from government to improve national resilience are driving this shift.

While headlines dwell on short-term political disputes, the bigger story is that the utility sector is being rebuilt. The drivers of this trend include a massive surge in demand for electricity driven by the digital economy, a regulatory overhaul of the water sector and a new partnership between private capital and the state with a view to lowering risk.

Utility companies come in two main flavours

You can divide the utility companies into two distinct groups. First are the companies that own and operate the heavy assets. They run the water pipes, electricity wires and pylons that keep the country functioning. Second are the service providers. These focus on data, billing and the technology that links the grid to the customer. Each group presents a different investment case.

The UK is at the start of a major, long-term infrastructure cycle and the work ahead is vast. The challenges range from meeting the energy demands of AI to modernising water networks. Both sides of the utilities sector are evolving in response and the market is recognising the growth potential of businesses once seen as dull.

Britain is currently overhauling its industrial strategy and utility companies have moved from the sidelines to the very centre of national-growth policy. For decades, investors treated the stocks in this sector as a set of bond proxies. The stocks were bought for their steady dividends and low volatility, but little else. A series of strategic shifts, driven by government policy, has changed that view.

The grid is the UK economy's main bottleneck

The first major shift is a crisis of capacity in our power networks. As John Pettigrew, the former chief executive of National Grid, has pointed out, the grid is becoming the main bottleneck for the economy. In 2023, he stated that the country needs to build seven times as much infrastructure in the next few years as it has in the past 30.

The problem is that the physical grid was not designed for the modern world. Engineers originally built most of this network to move power from large coal plants in the north down to the south. It was designed to serve houses and light up streets on a cold winter night. It cannot process the sudden, massive surge of electricity needed for the giant data centres that power the modern economy. This has created a backlog of projects waiting to be connected to the grid.

In 2026, the backlog of demand for data centres hit 50GW across 140 different sites. To put that number in perspective, the peak demand for electricity for the entire British grid is roughly 45GW. This means one single industry is now asking for more power than the entire nation uses on its coldest winter night when everyone is indoors using electricity. Global technology giants such as Amazon, Microsoft and Google are driving this demand. They have reclassified the UK as a primary growth zone, but they can't get the power they need because the old wires are at their breaking point.

National Grid has a multibillion-pound plan to reinforce the system. This includes building new substations and using advanced low-loss conductors. These technologies let the grid carry significantly more power without needing to put up entirely new pylons everywhere. This is a high-return path for growing assets because it avoids many of the planning headaches that come with new construction.

To handle the surge in demand, the government and the new National Energy System Operator have officially scrapped the old first-come, first-served model for grid connections. That old system let speculative projects sit on capacity for years, which stopped better-prepared data centres from getting online.

The new so-called Gate 2 reforms now prioritise projects based on how ready they are and how well they fit the national-energy plan. If a project misses its milestones, the operator immediately cancels its connection offer.

This allows National Grid to move from fixing things as they break to investing ahead of time and it can now justify building infrastructure before a data centre is even finished. This shortens the gap between spending money and earning a return, which is a clear win for shareholders.

The era of underinvestment in the water sector is over

A second major shift is happening in the water sector. The industry is moving away from a period of intense public and political tension. This was caused by years of underinvestment, resulting in frequent leakage and sewage spills that polluted rivers. The sector was essentially focusing on the short-term health of the pipes.

Adding to the pressure is the rise of AI; data centres do not just need electricity, they also require millions of gallons of water for cooling, making water companies a vital part of the tech infrastructure.

The 2026 White Paper, “A New Vision for Water”, is about making national infrastructure more resilient. The sector is starting a £104 billion investment programme for the five-year stretch that began in April 2025. This is nearly double what the companies spent in the previous five-year cycle. A single, integrated body that looks at both the environment and public health has replaced the previous fragmented oversight of Ofwat and the Environment Agency. This new regulator cares more about long-term results.

The Water Industry National Environment Programme is the main force behind this massive spending. It puts £24 billion specifically toward cutting sewage spills and cleaning up rivers. The programme requires companies to install thousands of monitors that track water quality around the clock. This ends the days when companies could essentially mark their own homework.

For investors, the focus has shifted from simple efficiency to whether these companies can actually finish such a mountain of work. The new rules introduce 25-year delivery plans to give pension funds the certainty they need by matching investment timelines to the long life of water pipes and plants.

Utility companies have a state-backed safety net

The third, and perhaps most important, shift is the emergence of a new partnership model between the state and utility companies. Historically, massive infrastructure projects were often considered too risky for private investors; if a project failed or stalled, the financial loss could be ruinous. To solve this, Great British Energy and the National Wealth Fund are now fully operational, reducing risk across the sector for investors.

With its £27.8 billion capital base, the National Wealth Fund has attracted more than £100 billion in private investment by offering debt guarantees and taking the first loss on higher-risk projects.

Essentially, the state acts as a buffer and makes projects safer for pension funds to back. This approach is especially valuable for emerging technologies such as long-duration energy storage and small nuclear reactors. Great British Energy also acts as a co-developer. It takes on the early risk of projects failing due to such things as environmental assessments. This leaves listed utilities free to focus on the high-margin work of building and running the assets. Because the state is now a partner in building core infrastructure, the investment risk to the whole system has dropped.

This state-backed safety net is also showing up in the retail energy market. The Great British Energy Local Power Plan provides cash for community energy projects that help keep the local grid in balance. This move toward decentralisation takes the weight off the distribution networks that the big utilities own. It lets these companies hold off on expensive physical upgrades and instead use digital tools to manage demand for power.

As more households pick up smart meters and tariffs that change based on the time of day, the whole system should work better. The shift to a data-heavy grid is turning the retail business into a high-margin tech platform. This change is a big reason why the outlook for the sector is better than it has been in years.

Key themes and plays for investors

The investment case for the listed companies is no longer just simply waiting for a dividend. It is about identifying which can most effectively turn this massive wave of state-backed capital into growing assets. For investors, the current market offers opportunities in companies that are becoming essential to the digital and green future of the country.

National Grid (LSE: NG) is the most obvious name to benefit from modernisation of the grid. As the sole owner of the transmission network across England and Wales, it is the physical gatekeeper of the emerging AI revolution. Under the RIIO-T3 regulatory framework that begins in April this year, the company has secured a real allowed return on equity of 6.12%. This is a decent improvement on the past, reflecting a need to attract more investment as well as the higher cost of funding the great grid upgrade.

Morgan Stanley recently pointed out that National Grid is moving away from being a low-growth utility and becoming a premium infrastructure investment. It highlighted that the company now has an asset growth target of 10% per year – well above the rate of inflation – and is heading toward earnings growth of 6%-8%. The firm is spending billions on 17 major projects to reinforce the north-to-south power corridors – essential for bringing power from offshore wind farms to the data-centre hubs.

The regulatory environment now allows for anticipatory investment. This means the firm can build ahead of demand. Doing so reduces the risk of stranded assets and ensures a steady stream of regulated income. As the asset base grows, the earnings potential of the company increases in a way that was not possible under previous rules. This shift from a yield-based valuation to a growth-based one is a key theme.

SSE (LSE: SSE) is another clear winner that has rebranded itself as a clean-energy champion. The firm is currently halfway through its ambitious investment plan, which involves spending £18 billion on offshore wind and transmission links. What makes SSE particularly interesting is how it has used the new state-utility partnership to lower its risk.

By working with Great British Energy, it can offload the early construction risks that used to weigh on its balance sheet, allowing it to maintain a strong credit rating while still pursuing aggressive expansion.

The partnership with the National Wealth Fund is also providing SSE with first-loss guarantees on complex projects. This is a significant advantage because it protects SSE from the cost overruns that often plague large infrastructure projects, lowering the overall cost of borrowing and raising returns for shareholders.

One could argue that SSE should be viewed as a high-quality infrastructure asset rather than a riskier power generator. This new reality hasn't escaped market attention – the shares have risen by 60% in just the last six months.

The winners in water and retail

In the water sector, the winners will be those who can navigate the new £104bn investment cycle. Severn Trent (LSE: SVT) and United Utilities (LSE: UU) are now working within a regulatory framework that puts long-term resilience ahead of short-term savings. This creates the potential for a large expansion in their regulated capital value, which is the base used to calculate their profits.

Severn Trent has already shown strong revenue growth following the latest tariff reset. The company is using a modular design for its assets, which helps keep construction costs low and delivery speeds high. This operational efficiency is a key driver of value.

United Utilities is also performing well, with a focus on its multi-billion-pound programme to reduce storm-overflow spills. Both companies are likely to benefit from outperformance payments if they hit their new environmental targets.

These companies offer a rare combination of inflation-linked returns and the security of a state-mandated investment cycle. The move to 25-year delivery plans provides the long-term visibility that institutional investors crave.

Centrica (LSE: CNA) and Telecom Plus (LSE: TEP) represent the technology-based, consumer-facing end of the sector. These companies do not own the heavy wires or pipes, rather the data and relationship with customers.

Centrica has moved far beyond its origins as a gas supplier. It is now a leader in flexible energy services, using smart data to help businesses and homes use power when it is cheapest. This capital-light model allows for high margins and strong cash flow without the debt burdens seen elsewhere in the industry. The company has a strong balance sheet and has been returning a lot back to shareholders through buybacks and dividends. Its move to a service-based model exposes it more to the economic cycle, but also provides the possibility of decent returns.

Telecom Plus, better known to consumers as Utility Warehouse, uses a similar approach by bundling energy with other home services. Its ability to use smart-meter data to lower wholesale costs has contributed to its higher levels of growth over the years.

By helping customers balance their own energy needs, it reduces the overall strain on the grid. This creates a win-win situation where the company earns higher margins and the customer pays lower bills. The scalability of this digital model is a significant advantage in a world where physical infrastructure is expensive and slow to build.

The heavy infrastructure is expensive and slow to build. The heavy infrastructure companies that form the core of this sector were stuck in a bit of a rut for a long time.

Over the last year or so, however, a clearer lead from the regulators has really lit a fire under their share prices. Because of that, most of the easy money has already been made, with some share prices rising by more than 50% in just a few months.

Still, we now have long investment horizons thanks to government policy. Patient investors who are happy to sit on these shares for years should see good rewards for the level of risk they are taking on.

National Grid is right at the front of this modernisation. It has gone from being a slow utility to becoming a much faster infrastructure business. It is never going to be a high-speed tech stock.

Nevertheless, its better growth outlook, along with those reliable dividends, offers a level of security that makes it one of the lower-risk stocks on the FTSE. It remains a vital part of Britain's energy future. For investors who wish to build a diverse portfolio of long-term, high-quality businesses, National Grid has a lot going for it.

The two big water companies, Severn Trent and United Utilities, have their own specific hurdles and opportunities to deal with. Both are updating their systems to meet new standards for clean water and service. They are getting a direct boost from the massive building phase the country is going through right now.

For investors looking for income, these are high-quality assets. They offer returns linked to inflation and benefit from a regulatory set-up that is far more predictable than the mess we saw in the early 2020s. There has always been little to choose from between the two as they tend to perform very similarly.

At the other end of the sector, Centrica and Telecom Plus offer a different mix of risks and rewards. These businesses depend much more on how good the management is and how the wider economy is doing. They also have to fight harder for customers in the retail market. However, they don't have to own all the heavy kit themselves.

This capital-light approach has let them keep up very high returns for shareholders through both buybacks and dividends. Telecom Plus, in particular, has shown it can grow even when things get tough by bundling home services into one efficient package.

Forced evolution brings opportunity

The utilities sector is entering a period of forced evolution. By clearing the infrastructure bottlenecks and establishing a clear partnership with the state, the industry is transitioning from being a defensive shelter to becoming a central pillar of national growth. For the patient investor, these companies offer a rare blend of stability and compounding growth, underpinned by the structural demands of the 21st-century economy.

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Some of the best investments are in businesses that operate in relatively unknown but essential markets, working in the background and fulfilling functions that other companies either don’t want to, or can’t afford to do themselves.

One such business is Restore (LSE: RST), the leading provider of physical and digital document-management services in the UK. It stores documents for public- and private-sector organisations, such as the NHS, and destroys old documents. There’s also a document-processing business (called Synertec), which helps companies send electronic and physical communications and a technology division (Restore Technology). All of these help the company’s customers manage their data, whether it’s on paper or in digital form.

Restore is beating expectations

In 2024, Restore generated £275 /million in revenue. The largest proportion of revenue (£170 million) came from the information management division, the one responsible for storing and managing documents. Despite the global shift over the past 20 years away from physical to digital documents, there’s still a vast and steady market for this kind of storage and Restore, as the largest operator in this area, has the economies of scale required to make it work.

The City has raised questions about the sustainability of this business multiple times over the past few decades, yet despite these concerns, the firm has consistently outperformed expectations. It’s helped that Restore has been able to move into new markets, such as operating a “digital mailroom”, which scans and digitises inbound and outbound mail for clients. It also manages exam papers and physical document processes within government agencies.

The second-largest division is a business called “DataShred”. This does exactly what it says on the tin. It’s the largest document-shredding operation in the UK, servicing tens of thousands of companies every year. The third and fourth key divisions are Harrow Green, which helps companies move office, and the technology business. Restore has found that companies moving offices need to digitise and destroy physical records, although they often choose to store old records as well. Despite this, the company agreed this week to sell Harrow Green for £5.5 million in cash to focus on the core business.

Restore's exciting potential

The technology business helps clients manage their tech assets, such as laptops and desktop computers, to ensure security throughout the asset’s life cycle. Some of its biggest clients here are public bodies, such as the Department for Work and Pensions. Restore helps the department set up new laptops, test laptops in use, and erase as well as repurpose laptops when they come to the end of their life. It can process thousands of laptops a day and has a two-week turnaround window to get each computer back into the workforce. Laptops that are not going to be repurposed for new joiners can be securely and responsibly disposed of.

This division currently accounts for just 11% of group revenue, but it has vast potential. Management has highlighted the AI product cycle, the release of Windows 11 and the beginning of the post-Covid technology refresh cycle as structural drivers for growth. The current best practice is for companies to refresh technology every three to five years. Overall, the firm has 500 active customers at present, served by 310 employees, with the capacity to refresh 13,000 assets a week.

The technology business has exciting potential over the coming years, but investors shouldn’t overlook the document side of the organisation. To bulk out this division, in March, Restore paid £33 million to acquire Synertec, which owns a proprietary software platform that helps clients communicate with their customers across different channels. Using the software, clients can upload customers’ communications to Synertec’s systems and select how they want the information to be distributed.

This can include documents printed in braille, for example, or communications sent out via text message. Synertec can turn around the client’s data request overnight, a key selling point for its largest client, the NHS, with which it recently agreed a new four-year framework set to start in the first quarter of next year. Synertec also works with clients such as P&O Ferries, Screwfix and Hotpoint.

A new direction for Restore

Despite its strengths, shares in Restore have declined by around 50% since the pandemic, even as adjusted profit before tax has risen from £23.2 million in 2020 to £34.4 million in 2024. Lack of confidence in the company’s strategy, multiple compression and general apathy among investors towards UK small caps all appear to be to blame.

However, after a change of management two years ago, the City is starting to come around to the growth story. Charles Skinner returned as CEO in 2023, after Charles Bligh, who joined as CEO in 2019, resigned. Skinner stepped down in 2019 following a decade at the helm of the group, during which time the shares returned more than 2,200%. Skinner has spent the past two years refreshing the group and its strategy, but the market is yet to factor in the changes.

According to analysts at Berenberg, the shares are trading one standard deviation below the 10-year average price-earnings (p/e) ratio of around 15; the same is true on an enterprise value to Ebitda basis. Berenberg has the stock trading at a 2026 p/e of 9.9 and a free cash flow yield of 8.3%.

Canaccord Genuity takes a similar view, with a p/e of 10 pencilled in for 2026 and a free cash-flow yield of 8.3%. What’s more, in its latest trading update, Restore reported growth ahead of market expectations, with margins returning above the medium-term 20% target, prompting a wave of analyst growth upgrades. This growth, coupled with a return to the company’s 10-year average valuation, could generate an upside of nearly 70% for the shares in the best-case scenario.

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The way investors view defence stocks is changing. They are shifting from being seen as slow, plodding businesses to being viewed as genuine growth firms. This shift has led to a sharp rise in share prices and has made defence one of the strongest parts of the market over the past three years. The question is whether this enthusiasm is justified and whether the firms that supply military customers can meet these higher expectations.

For many years after the Cold War, investors expected global defence spending to fall. Governments moved away from large standing armies and focused instead on welfare and social programmes. This so-called peace dividend held back the defence industry for decades. That period has now come to an end. Growing geopolitical tension, highlighted by Russia’s continuing aggression and China’s increasing pressure on its neighbours, has forced Western governments to rethink security. This is not a temporary surge in spending, but a lasting commitment to stronger deterrence and modernisation. It means steady demand for equipment and technology, long-term contracts and a sustained period of high activity across the defence supply chain.

The scale of this shift is already visible in public finances. Western governments are putting higher defence spending into law, turning policy goals into binding budget commitments. These plans focus on advanced equipment and long-term readiness, creating a strong investment case for the sector. The renewed need for scale, common standards and faster delivery supports the prospect of dependable long-term growth for companies that provide essential systems and components across air, land and sea.

The geopolitical foundations of rearmament

After the Cold War, the world entered a brief and unusual era. From 1991 onwards, the US was the only superpower and Western political and economic ideas spread rapidly. But this so-called “liberal international order” never truly took root outside the Western alliance. Its foundations were weaker than they seemed – a fact laid bare by the 2008 financial crisis. That crisis shattered trust in established leaders and institutions. The deep recession that followed wiped out wealth and led to years of sluggish growth. Disillusionment with globalisation fed a rise in populism and nationalism, as people began to associate the US-led system with instability and inequality. The dream of a smooth, borderless global economy started to look naïve.

China avoided much of the fallout. Its economy kept expanding and its share of global output jumped from around 6% in 2007 to roughly 20% today. That resilience gave China’s state-driven model new credibility at home and abroad. The collapse of Lehman Brothers showed the limits of US power – and Beijing saw an opening. With the US on the back foot, China grew more assertive and confident on the world stage.

Since then, global divisions have deepened. China has built its own web of influence through economic and political initiatives. The Belt and Road Initiative, once billed as a trade project, has become a strategic tool spanning more than 150 countries. It sits alongside the Global Security Initiative, the Brics group of nations and the Shanghai Cooperation Organisation – all offering partnerships that come without the political strings attached to Western aid and investment.

The US, for its part, has turned inward. Weighed down by inequality and endless overseas commitments, it has scaled back its presence in Europe and the Middle East to focus on the Indo-Pacific. That has forced allies to spend more on defence, creating not greater stability, but a world that is more divided and heavily armed. The rivalry between Washington and Beijing is now about more than power or trade. It is a battle over whose values will define the next world order – one in which nations are prioritising security and resilience over the efficiency that once defined the post-Cold-War age.

The West's arms race

Western nations are shifting their defence strategy, moving from expeditionary operations toward large-scale deterrence against peer rivals. Expeditionary operations involve deploying smaller forces to distant theatres, such as the Nato-led air and naval mission in Libya in 2011 to enforce a no-fly zone. The new focus on large-scale deterrence involves building massive, high-tech capabilities to prevent a major global power from attacking. This is demonstrated by Nato’s Steadfast Defender exercises, which test the rapid movement of tens of thousands of troops across Europe. This change has led to firm, long-term spending commitments across allied nations as they move quickly to close gaps in military capability.

Nato has formalised this shift. The original 2014 Defence Investment Pledge called on members to spend at least 2% of GDP on defence. At the 2025 Nato summit, members agreed to raise that to 3.5% of GDP by 2035. That provides a clear and lasting foundation for the revenue outlook of defence contractors.

In Britain, spending is rising, driven by the nuclear deterrent and the Global Combat Air Programme (GCAP). The UK is overseeing the delivery of Dreadnought nuclear submarines and remains a key partner in the Aukus pact, which will supply Australia with nuclear-powered submarines. These are vast, multi-decade projects that underpin the industrial base of the sector.

Germany has made one of the most dramatic policy reversals. In 2022, it announced a €100 billion special fund for defence. The money is focused on rebuilding land forces after decades of underinvestment. Germany is also working with France on the Main Ground Combat System project, which aims to create a new generation of European battle tanks.

The US continues to lead the world in defence spending. Its budget now targets faster modernisation and production. The army is pushing ahead with its Next Generation Combat Vehicle programme, which includes the new M1E3 Abrams tank. It also dominates the global arms market through the Foreign Military Sales programme, which secures long-term maintenance contracts for platforms such as the F-35 fighter jet.

Japan is another major player. Faced with growing pressure from China, it is investing heavily in modern equipment. Japan is a key industrial partner in GCAP, working with Britain and Italy on a sixth-generation fighter. The country is also developing long-range strike systems, marking a clear shift away from its post-war focus on self-defence.

France remains committed to maintaining a strong and independent defence sector. Its aerospace and naval industries are central to Europe’s strategic base, and it continues to work with Germany on the Main Ground Combat System (MGCS) project. Timelines are long, but these programmes anchor industrial cooperation across the continent.

The defence stocks well placed to benefit

In the last few years, it hasn’t mattered which defence stocks an investor owned, as they nearly all rose strongly. However, future market advantage will belong to companies with the most dependable income. That strength comes from owning generational platforms and providing essential support services.

BAE Systems (LSE: BA) is the cornerstone of the UK defence industry, securing the nation’s nuclear future. The firm boasts a record order backlog of £75.4 billion, more than double what it was 10 years ago. Its largest long-term revenue driver is the naval nuclear franchise, specifically the SSN-Aukus and Dreadnought submarine programmes. BAE is investing significantly in its facilities at Barrow-in-Furness to double capacity, securing production volume for decades. Its acquisition of Ball Aerospace also successfully expanded its already large exposure to the robust US defence market. BAE is a diverse global business that generates only a quarter of its revenue in the UK, with the US making up almost a half. Perhaps its biggest risk is Saudi Arabia, its third most important market, if the country is pulled closer to China’s sphere of influence and is pressured to consider Chinese defence equipment.

Rolls-Royce Holdings (LSE: RR) is roughly one-third exposed to defence and is strategically essential, primarily through its unparalleled expertise in naval nuclear propulsion. Rolls-Royce Submarines supplies the nuclear propulsion plant for the entire UK nuclear submarine fleet and will supply all the nuclear reactors for both the UK and Australia’s new SSN-Aukus submarines. This provides a critical, long-term franchise integral to the UK/US strategic nuclear partnership. Rolls’s defence segment targets a midterm operating margin of 14%-16%, but the division is supported by the massive strength of the civil aerospace division, which recently reported an almost 25% operating margin. This robust commercial cash flow provides the finance needed for the significant capital investments demanded by the Aukus project.

Babcock International Group (LSE: BAB) focuses on long-term support contracts, particularly for marine and nuclear divisions. The firm is the prime contractor for the UK Royal Navy’s Type 31 frigates. More importantly, its Arrowhead 140 frigate design has become a commercial success. The ship has already won export contracts from Poland and Indonesia, providing a major earnings catalyst. The Cavendish Nuclear arm provides highly predictable revenue streams through long-term support and facility-management contracts across UK nuclear licensed sites. This focus on long-duration services minimises the margin volatility associated with high-risk platform development.

Qinetiq Group PLC (LSE: QQ) operates a unique, low-risk model centred on technology and testing services. Its financial future is underpinned by the Long-Term Partnering Agreement with the UK Ministry of Defence, recently extended for another five years to 2033. This £1.5 billion extension covers testing and evaluation for future capabilities, including GCAP and innovative weapons systems. The service-based revenue structure provides predictable earnings.

Following its restructuring, Melrose Industries’s (LSE: MRO) defence exposure lies within its structures division, which supplies airframe components. Defence represents 34% of the US revenue in this segment. Management is working consistently to improve margins, anticipating that the structures division will achieve an operating margin in the low teens by 2029. Melrose, as a key component supplier, is using strong demand and inflation to renegotiate long-term contracts and turn higher volumes into higher profits.

Rheinmetall (Frankfurt: RHM) is an important high-volume defence stock for land defence and ammunition in Europe. The company has reported a surge in defence sales recently, concentrated in vehicle systems and the weapons and ammunition division. Management projects consolidated sales growth of 25%-30% in the 2025 fiscal year, supported by strategic investment to create new capacity across Europe. Rheinmetall’s ammunition division, benefiting from scarcity, is generating very high margins. It is strategically poised to capture a significant share of Nato Europe’s equipment spending.

As the world’s largest defence contractor, Lockheed Martin Corporation (NYSE: LMT) holds massive strategic platform, such as the F-35 and Aegis systems. Its business is structurally dependent on platforms that define the next generation of warfare. However, the firm is susceptible to fixed-price (FFP) contractual risk. This is where the company bears the risk of significant cost overruns. Programme charges are commonplace in defence contracting; in recent quarters, Lockheed Martin has taken significant hits from them. This volatility highlights that, while sales volume is guaranteed, earnings can be uncertain. Despite the increase in business since the start of the Russia-Ukraine war, Lockheed Martin is one of two shares profiled here (along with L3Harris) that have disappointed. Arguably, however, it is one of the cheapest and most diverse ways of gaining exposure to defence trends.

RTX Corporation (formerly Raytheon Technologies, NYSE: RTX) specialises in missile systems, air defence and naval programmes. RTX is benefiting from a depletion in missile stocks as Western-aligned nations support Ukraine. The missiles division has secured major awards for systems such as Amraam and Stinger. Like many defence companies, RTX has non-defence exposure. This comes via its commercial jet engines, Pratt & Whitney, which are a major competitor to Rolls-Royce’s. The stability provided by its commercial aerospace segments acts as a financial buffer, but lowers the net impact of defence spending.

Northrop Grumman Corporation (NYSE: NOC) focuses on strategic deterrence programmes, such as the B-21 Raider bomber and the Sentinel Intercontinental Ballistic Missile (ICBM). Its backlog stands at more than $90 billion and stretches decades into the future. Management expects the acceleration of production to drive significant sales growth. Like Lockheed Martin, Northrop faces FFP execution risks, but is making strategic choices to sacrifice immediate margins on early B-21 production to secure long-term dominance.

General Dynamics Corporation (NYSE: GD) is a diverse firm, with both defence and non-defence segments. It is split into four similar sized divisions: marine systems (submarines); technology (defence information systems); combat systems (land) and aerospace (Gulfstream). The combat systems segment is a primary beneficiary of European land rearmament, securing contracts for the Piranha and Ascod vehicles. The company’s overall operating margin expansion is driven by both defence and the highly profitable Gulfstream private-jet business.

L3Harris Technologies (NYSE: LHX) is a high-tech company specialising in command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance (C5ISR) and space systems. The firm reported an outstanding book-to-bill ratio, which compares orders received to orders delivered, of 1.5 times, suggesting demand is accelerating. Focusing on high-demand, high-margin technology, and not on older legacy manufacturing, is a priority. This approach aligns with allied budgets that favour integrated, multi-domain operations. The firm was the product of a merger of two rivals in 2019 and the shares have thus far failed to live up to the promise, but the outlook has been improving.

Thales (Paris: HO) provides exposure to technology and digital warfare. A quarter of the business is owned by the French state. It is a complex business that is considered strategically important by the French government. Thales is a technology company as much as a defence business, having made large investments in areas such as cybersecurity, artificial intelligence and quantum technology. Additionally, it produces avionics for aircraft and short-range missile systems.

Understanding the risks

Demand for defence is secure, but it’s not without risks. Fortunately, these are largely offset by long-term contracts and government planning. The first risk involves finances. Western governments face tight budgets. In the UK, the new defence target of 3.5% of GDP is demanding. Ageing populations and high debt levels make this goal tough to maintain. However, long-term contracts ease this concern. Programmes such as Aukus and GCAP last for generations. Governments commit to infrastructure and they sign contracts for development and production that span decades. These agreements ensure steady revenue for contractors, even if budgets face short-term cuts.

The second risk stems from the changing nature of warfare. Conflicts are beginning to focus on drones, cyber threats and technological espionage. Current spending often targets traditional platforms, such as tanks and ships, which may not address new, unconventional threats. However, listed companies benefit from guaranteed spending, regardless of the platform’s effectiveness. Long-term government defence plans secure this funding, protecting UK and Western-aligned firms. The third risk involves public opinion. As governments shift money from welfare to military strength or raise taxes to fund both, public support may weaken. This political challenge could delay or reduce future budgets, affecting defence companies.

Still, there is an extraordinary opportunity here for defence companies that are facing levels of sustained growth not seen for almost 40 years. BAE Systems is the obvious pick for those seeking broad exposure. It is no longer the cheap stock it once was, but it gives pure exposure to defence spending that provides exposure to both UK and US defence spending. It operates across a large number of product types and has secured contracts that could run into decades. For those looking for a cheaper business, Lockheed Martin, the world’s largest defence business, is on a discount to the sector. It requires investors to look beyond the problems caused by the fixed-price contracts, but is the purest way of gaining exposure to the US defence budget.

Babcock gives exposure to long-term support contracts, which are vital in maintaining programmes and facilities. Finally, L3Harris has struggled slightly in recent years from issues created by its merger, but it looks as if its problems are behind it. Should that be the case then earnings growth could come through at a rate even higher than the other defence stocks.

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At the heart of the global financial markets are the exchanges, such as the London Stock Exchange, the New York Stock Exchange, and the Nasdaq. The function they fulfil in the market is straightforward, yet vital. Exchanges match buyers and sellers and publish the data on the trades. They’re also responsible for bringing assets to market, which can range from shares in public companies to contracts on commodities and interest rates. Most exchanges don’t own the companies that are listed – they only facilitate buying and selling by market participants and take a cut for the privilege.

The CME Group (Nasdaq: CME) is a little different. It is the largest futures and options exchange in the world and, unlike other exchanges, it owns the futures contracts traded on its platforms. These range from the E-Mini S&P 500 contract to interest-rate futures, crude oil, cattle and even bitcoin. For example, more than one million contracts of WTI oil futures and options trade daily, with approximately four million contracts of open interest on the exchange. In this case, one contract is equivalent to 1,000 barrels of oil. The most liquid contract on the exchange, and indeed in the world, is the Three-Month SOFR Futures contract, used for hedging interest-rate exposure.

CME Group has long-term potential

The CME Group’s edge lies in its market position. Liquidity begets liquidity – the more traders there are in the market, the easier and cheaper it is to buy and sell. Along with the advantage of scale, the CME Group’s position in the market for debt futures means it’s well-positioned to capitalise on ballooning government deficits around the world.

Where the company lacks exposure, however, is in the equity futures market. Of all the major exchanges, it has one of the lowest levels of exposure to equity markets. Overall, 18% of revenue in 2024 came from equity contracts, compared with 27% for interest rates, 13% for energy and 10% for agricultural commodities.

The company’s growth over the past five years provides a good indication of its long-term potential. The number of contracts traded across its platforms has jumped from around 18 million a day on average in the first quarter of 2019 to around 30 million. Meanwhile, the revenue per contract has steadily increased. In equities, revenue per contract is expected to rise from $0.529 in 2022 to $0.635 in 2026, according to UBS’s estimates. The overall group average revenue per contract is expected to have risen from $0.643 to $0.689 by 2026.

That might not seem like much on a contract-by-contract basis, but when CME facilitates the trade of 30 million contracts a day, revenue of $0.689 per deal adds up. The group’s Ebitda margin has risen from 67.4% to 70.3% since 2022.

Trading is just part of its offering. CME Group also sells market data. This is becoming an increasingly important part of all global exchanges. LSEG, which owns the London Stock Exchange, generates only 3% of its revenue from trading. A total of 12% of the CME Group’s revenue comes from the sale of data, which is generally far more profitable than trading activity. In the third quarter, CME’s revenue from market data reached a record high, up 14% due to expanding demand, particularly in the Asia-Pacific and Europe, the Middle East, and Africa regions.

CME Group expansion

Steady, but profitable growth has been the name of the game for CME. However, it’s now capitalising on two trends to accelerate expansion. The first is crypto. The group has launched a range of crypto contracts and in the third quarter it facilitated the trading of 340,000 contracts per day, up by more than 225% year-on-year. The group plans to accelerate this growth with the introduction of 24-hour trading.

The second is increased trading in the retail sector. Retail investors have surged into the US futures and options markets since the pandemic, aided by trading apps and easy leverage. Management is leaning into this expanding market. It recently signed an agreement with sports-betting platform FanDuel, which will provide access to approximately 13 million potential new retail accounts.

The exchange has also launched products to facilitate trading in smaller volumes, such as one-ounce gold futures as well as more flexible products, such as weekly agricultural options. As well as these levers, the group is also a leader in AI and machine learning. It’s been using AI to launch new products and reduce settlement and trading times, as well as administration.

CME Group's income kicker

With multiple routes to growth over the coming years, CME Group has all the hallmarks of a growth play. But unusually for US growth stocks, it also has an income kicker. The group pays a regular dividend, supplemented by special dividends. Last year, it paid out $10.80 per share and this year it’s paid out four regular quarterly dividends totalling $5 per share, with the final special dividend yet to be announced (last year, the final payout was $5.80). It’s not inconceivable that the total dividend in 2025 could exceed $11 per share, a yield of 4%. With net cash on the balance sheet (net of regulatory assets) and an Ebitda ratio in the 70s, CME has the capacity to maintain this payout.

Based on the current growth trajectory, analysts at UBS have the stock trading at about 19 times 2029 earnings. That’s not demanding at all for a business that’s consistently registered steady, high-margin growth and has a record of returning cash to investors. CME appears to be an attractive hedge against market volatility and uncertainty with an added growth bonus in the form of its exposure to crypto contracts.

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The chancellor has finally admitted that “further measures on tax” will be announced in the Budget on 26 November. “Those with the broadest shoulders” – the ever-growing number of higher- and top-rate taxpayers – are likely to bear the brunt of it. Meanwhile, pensions, traditionally a bastion of tax efficiency, have begun to look less appealing, thanks to limits on what you can contribute, restrictions on tax-free cash and the prospect of death taxes of up to 67% following changes in the last Budget.

Against this backdrop, venture-capital trusts (VCTs) look startlingly attractive. When you support young British companies by investing in VCTs, you could receive up to 30% income-tax relief – a tax break of up to £60,000 if using the full £200,000 VCT allowance. In addition, any dividends VCTs pay are tax-free. This could be particularly valuable now the dividend tax-free allowance is at a historic low of £500.

And despite the economic woes of the past few years, VCTs have continued to deliver a regular stream of dividend payments. Over the last five years active generalist VCTs have on average paid dividends totalling 32% of the starting net asset value (NAV), rising to 68% over ten years. No wonder, then, that experienced investors keep on turning to VCTs.

Venture capital trusts to consider

The long-established British Smaller Companies VCTs have been a favourite among investors for years. This year, British Smaller Companies VCT (LSE: BSV) and British Smaller Companies VCT 2 (LSE: BSC) raised £9.5 million in the first 24 hours of the offer opening. The two VCTs target business-services companies. The portfolio includes some impressive outfits such as Unbiased, a platform that reviews financial advisers and is expanding rapidly in the US. Another investment is digital special-effects studio Outpost VFX, which has worked on projects such as Captain America: Brave New World and The Lord of the Rings: The Rings of Power. Over the five years to September 2025, the VCTs have paid cumulative dividends equivalent to 40.9% (BSV) and 43.0% (BSC) of the starting NAV of each VCT.

Consider also the three Northern VCTs: Northern Venture Trust (LSE: NVT); Northern 2 VCT (LSE: NTV); and Northern 3 VCT (LSE: NTN). They target more established firms with growth potential. Manager Mercia’s sweet spot is regional businesses (more than half of the portfolio is outside London and the South East) in the healthcare and technology sectors. This is an area where Mercia is achieving success after success. The latest example is The Beauty Tech Group, which allows people to apply beauty techniques such as laser therapy at home. It floated last month at a £300 million valuation. The VCTs target annual dividends of 4.5% to 5% of NAV. Over the five years to September 2025, the VCTs have paid cumulative dividends worth between 29% and 35% of starting NAVs.

The Triple Point Venture VCT (LSE: TPV), meanwhile, brings something different to the table. It’s a newer VCT and it targets earlier-stage companies. That is when competition, and consequently valuations, tend to be lower and the potential returns higher.

And this approach is starting to bear fruit: the VCT already bagged a high-profile exit when credit-checking platform Credit Kudos was acquired by Apple just two years after Triple Point invested. The VCTs target an annual dividend of 5% of NAV. Over the five years to September 2025, the VCT has paid cumulative dividends equivalent to 15.6% of the starting NAV.

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“The lesson of history,” it is said, “is that the lessons of history are never learned.” Does the same apply to investment? Investors, amateur and professional alike, spend a huge amount of time poring over charts, historical precedents, analogies and past behaviour to find clues to the future.

Regulators warn us that past performance is not indicative of future results but, as Baroness Helena Morrissey reminds us, “we are instinctively drawn to think that the past is a model for the future”. The problem is that history never repeats itself and, even if it did, the outcome would vary as people, perhaps drawing on past precedents, react differently.

Investors are better served by remembering Mark Twain’s observation that “history doesn’t repeat itself, but it often rhymes”, and by accumulating pearls of wisdom from their own experience, as I hope I have in the last 47 years, 42 of them in investment.

Being good at sums, I started out qualifying as a chartered accountant at what is now KPMG, though I impetuously left after qualifying to spend two years in corporate advisory under Victor (aka “Lord”) Blank. Fortunately, I realised before he did that the varied skills and personal characteristics necessary in that career were conspicuously lacking in me and that I was more suited to the world of investment.

Good investment goes beyond the numbers

Still, those early years taught me priceless lessons, especially that, as any good accountant knows, the secret of good investment does not lie solely in the numbers. Many investment companies have a screening system to identify companies that combine good margins, high returns on capital, a solid balance sheet, revenue growth, cash generation and so on as part of their “process”. The problem is that these processes are all more or less the same, so the stocks identified are fully valued. The best opportunities are often in the stocks that the screens reject.

An early quote of Warren Buffett’s that I learned was that “when a management with a reputation for excellence encounters a business with a reputation for bad economics, it is the reputation of the business that survives”. It sounds great but management success is not necessarily transferable from one business to another. Simon Wolfson, CEO of Next, points out that 28 of his top 30 employees were promoted internally and have a combined 500 years of experience at Next.

“Bad economics” is not a given in any business. Companies fail because they prove incapable of adapting to change or just give up, rarely because their business has become obsolete. Woolworths continues to thrive in Australia and South Africa, where Wimpy, not McDonald’s, is the market-leading burger chain. 3i’s hugely successful European retail chain Action mimics Woolworths, as does the UK’s B&M. Tim Waterstone built up his chain of bookshops to market dominance when his competitors despaired of competing with Amazon and downloads.

Professional investors will often tell you that they never invest in a business they don’t understand. I doubt it is possible for any manager to really understand any business they invest in; an investor covering dozens or hundreds of companies cannot compete with a dedicated management team. The advantage investors have is objectivity, the ability to see the broader picture and the ability to walk away.

Investment-management companies boast of the number of analysts they employ globally, the number of company meetings they hold and the depth of their research. This often leads to overanalysis, whereby huge amounts of research improves the investor’s confidence but doesn’t result in a better decision. Many of my best investments were made almost on the spur of the moment from a single insight.

Hope is not an investment strategy

Nathan Rothschild said that the secret of his success was that “I never buy at the low and I always sell too soon”. Yet many investors try to finesse their investment decisions, holding back from an investment decision in the hope that a share price would revisit a high or low. I found it helpful to assume that any share I bought would promptly fall 10% and any I sold rise 10%. I would be pleasantly surprised if it turned out differently.

“Run your profits, cut your losses” has always been a popular dictum but is contradicted by “nobody ever went broke taking a profit”. True; they went broke selling a winner and reinvesting in a loser. It is incredibly hard to know when to sell. Most people sell too soon but selling a share in freefall is mortifying. “Up like a rocket, down like a stick,” the wags say. I sometimes top-slice holdings but am a reluctant seller. However, the market regularly reminds us that great companies and funds don’t outperform forever.

“The stock market can stay irrational for longer than you can stay solvent” is another popular favourite. Any professional investor will tell you that it can be a long, long wait before an investment comes good, so you have to be very patient.

They say this after it has come good, not after three or five years of dud performance when they are wondering if they have made a mistake. Also, remember that markets are irrational much less often than many professionals believe – investment sages are not known for their humility or lack of self-confidence.

“Cheap is not cheerful” is a strapline I picked up along the way. Investors are drawn to lowly valued shares or markets (like the UK) but they are usually cheap for a reason. Cheapness is the easiest excuse for a bad investment. That is not to belittle “value” investing but the best hunting ground for value is recovery – which is contrarian and risky – or undiscovered potential.

Go for growth

The opportunity in “growth” investment is the reluctance of investors to believe that high growth is sustainable. No analyst likes to predict sustainable growth above 15% per annum but, as the leading firms in the technology sector have shown, it does happen. Still, there are many blind alleys: companies whose technology is superseded by others, who fail to monetise the potential, whose big idea turns out to be less revolutionary than expected or just a fad.

An early lesson every investor needs to learn is that they will make mistakes and lose money. The two don’t always go together. A mistake can be profitable and a rational decision can lose money: you played the odds wrongly but got lucky, or the other way round. Learn the lessons of the mistakes and move on.

An early boss, hedge fund manager John Angelo, used to tell me, “opinions are like a**holes; everybody’s got one”. Much later, I learned that it was, broadly, an aphorism of Winston Churchill’s.

John’s point was that he was only interested in what was going to happen and what it meant for markets, not in subjective opinions. Good investors shy away from opinions on politics, economics and current affairs but listen to all the arguments, distrusting the consensus. You learn much more that way.

Bumps in the road

The greatest lesson of all is that markets go up in the long term. Time turns most bear markets and crashes, which seemed so serious at the time, into mere blips in the long upward path. Yet the narrative of the investment gurus, faithfully reported by the media, is always to talk down the outlook for markets, to warn of “bubbles” and predict disaster just around the corner.

It is a standing joke of investment professionals that headlines of “billions wiped off stockmarkets” and lurid magazine covers depicting an absence of hope are a signal to buy rather than sell. But retail investors in the UK are more easily influenced, which helps to explain why the British investment market struggles. Bad news sells and Britons are not known for their optimism.

“The more you know, the more you realise how little you know,” said Bertrand Russell, though the sentiment goes back to Aristotle and Socrates: “Wisdom is knowing how little you know.” Experience makes you come to terms with this more than it teaches you how to invest.

You will not be right all the time. Even Roger Federer won only 54% of the points he played in his tennis career and many of the points he lost were unforced errors, probably regularly repeated. As Baillie Gifford points out, a good investment can multiply your money but a bad one will only lose it once. A missed opportunity may be more painful than a loss.

One of my best investment decisions was back in 1992 when I correctly predicted Britain’s departure from the exchange rate mechanism (ERM) and, against the overwhelming consensus, the economic and market consequences of our exit. This laid the foundations of five years of great performance. All I did was recognise the close parallels with Britain’s departure from the gold standard in 1931, a lesson in economic history I had absorbed at university.

One of my worst decisions was to sell my holding in a gold mining fund two years ago, having held it for about ten years. I despaired of the failure of shares in gold miners to respond to a rising gold price and switched into an energy fund.

The fund I sold performed strongly last year and has doubled in 2025, while the energy fund has remained marooned. I daren’t switch out for fear of being whipsawed. You never learn all the lessons from experience that you should have.

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Galliford Try Holdings (LSE: GFRD) is a British construction company worth £534 million, with a diversified set of customers. In Scotland, it operates as Morrison Construction. Galliford has changed markedly since 2020, when it sold its housing businesses to Bovis for £1 billion and then invested in growth and the acquisition of several infrastructure businesses.

These include Lintott, MCS Control Systems, Ham Baker Engineering (a company active in the water industry) and AVRS (which operates in the energy and nuclear sectors). Galliford serves a wide range of markets, including defence, education, facilities management, health and infrastructure; 91% of clients stem from the public and regulated sectors.

Infrastructure is a priority for the government. Galliford intends to increase revenue to more than £2.2 billion by 2030, from £1.77 billion in 2024, and achieve divisional margins of at least 4% (up from 2.5%).

Galliford Try taps into a wide array of sectors

Examples of recent projects in nine different sectors are: a commercial office development in Reading (the value of the contract was £84 million); East Lothian Community Hospital (£72 million); Catterick Garrison (£60 million); Carlisle Southern Link Road (£140 million); Brent Cross affordable homes (£75.8 million); Barony schools campus, East Ayrshire (£59 million); HM Prison Rye Hill (£95 million); fire safety improvements at HMP’s Wakefield and Moorland (£100.9 million); and Keadby Pumping Station in the East Midlands (£35 million).

Several procurement systems feed the pipeline of orders. Examples include the Cabinet Office’s Crown Commercial Service (CCS), which serves the Ministry of Defence and the Ministry of Justice; the Department for Education’s school-building framework (which covers the lion’s share of school building in England); and the NHS’s ProCure 23 Framework (Galliford is one of six companies serving the NHS).

Galliford is also involved in procurement frameworks for all 13 of the UK’s major water companies and Hub Scotland (Galliford is in four of five regional hubs for Scottish public buildings, from stations to schools).

And the company has this year won a place on the National Grid’s (NG) five-year major works framework for upgrading the grid. The anticipated value of the contract is £9 billion over five years. The work is a part of NG’s overall £59 billion upgrade).

Galliford has three divisions: building, infrastructure and specialised services.

Building accounts for 51.5% of revenue. The division designs, constructs and refurbishes assets in sectors where it has expertise, such as education, health, defence, justice and commercial.

Infrastructure provides 48.1% of sales and consists of activity in the highways and environment subsectors (notably water and sewage, where Galliford is one of the largest contractors). Specialist services includes facilities management, fire stopping and cladding, digital infrastructure, and investments (such as public-private partnerships, or PPPs). Specialised services revenues are mainly reported within building or infrastructure, with the PPP component providing 0.43% of total revenue.

Galliford’s results for the year to 30 June 2025 showed revenue of £1.875 billion, up 6.3%. The order book totalled £4.1 billion (equal to more than two years’ turnover) and includes 92% of projected sales for the current year and 75% of next year’s. The largest sectors in the order book include work in the environment, highways, education and defence subsectors.

In August 2025 Galliford was nominated one of four finalists in the Best Place to Work – Large Firm category for the Construction News Workforce Awards. Galliford also has the London Stock Exchange Green Economy Mark for activities benefiting the environment.

Galliford Try's income and profitability

Galliford’s results for the year to 30 June 2025 show sales of £1.875 billion, up 6.3%, with adjusted pre-tax profit rising 28.6% to £45 million. Earnings per share (EPS) rose 23.4% to 33.7p, and the dividend per share climbed 22.6% to 19p; the payout has more than trebled over the past four years. Net cash totalled £237.6 million.

The divisional operating margin was raised to 3% from 2.5% in 2024, and is therefore well on the way to the 2030 target of 4%. The shares rose 11% after the 2025 results. CEO Bill Hocking said that all the businesses have performed well since 30 June, and trading has been slightly ahead of expectations for 2025-2026. A buyback of £10 million has been announced for 2025-2026, following one for the same amount in 2024. Galliford has a record of profitable growth and intends to deliver its 2030 strategy of raising revenue to more than £2.2 billion by supplementing growth in its core markets of building, highways and environment with growth in adjacent markets. These include the private-rental sector, green retrofit, and the affordable-homes market.

Galliford Try has a recent share price of 539p, a forward price/ earnings (p/e) ratio of 15.4 and a useful forward dividend yield of 3.5%. Analysts’ one-year price target is 598p.

Hocking holds 1.95 million shares worth £10.5 million, so he has a substantial personal stake in his company’s success. If the group succeeds in hitting its 2030 targets, revenue will be doubled from 2021 and up 24% from 2024, reaching in excess of £2.2 billion. And the divisional operating margin, 2% in 2021 and 3% in 2025, will be raised to 4% by 2030. The overall construction sector is in a downcycle, so now is a good time to invest in Galliford Try with its reasonable valuation, targeted revenue and margin growth, and 3.53% dividend yield.

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In an era where digital communication dominates, the enduring appeal of a handwritten card might seem quaint. Yet, for Card Factory (LSE: CARD), the UK’s leading specialist retailer of greeting cards, gifts and celebration essentials, this personal touch is the cornerstone of a surprisingly resilient business. Despite the rise of online cards, enough customers still value the sentiment of a physical card to keep Card Factory’s model relevant. Combine this with low-priced products, a repeatable purchase cycle and a remarkable recovery from the pandemic, and you have a company that’s not only surviving but flourishing.

Despite these qualities, the shares look good value too; trading on a price-earnings (p/e) ratio of less than seven – a standout bargain even among the UK’s undervalued small-cap stocks. For investors, this could be a rare chance to buy into a business with solid fundamentals and decent growth prospects at a deeply discounted price.

Card Factory is a high-street mainstay

Founded in 1997 by a Yorkshire entrepreneur as a market stall, Card Factory has grown into a high-street mainstay, with more than 1,000 stores across the UK and Ireland. It also operates an online platform, which competes with Moonpig and Funky Pigeon. Its core offering of affordable greeting cards, balloons and party supplies taps into a cultural habit that shows no sign of fading. While online platforms such as Moonpig have gained traction, particularly during the Covid lockdowns, Card Factory’s success hinges on the fact that many consumers still prefer choosing and sending a physical card. A handwritten note for a birthday, anniversary or condolence carries an emotional weight that an online printed card does not.

This preference is reflected in the numbers. The UK greeting-card market, while slow-growing, remains stable. Card Factory’s value proposition – offering cards starting at under £1 and gifts priced to suit tight budgets – ensures it captures a significant share of the market. Its vertically integrated model, with in-house design, printing and warehousing, keeps costs low and margins healthy.

Card Factory’s business model is uniquely suited to weather economic storms. Its low-price goods are affordable even when household budgets are squeezed. The repeatable nature of its products, tied to recurring occasions such as birthdays, Mother’s Day and Christmas, ensures steady demand regardless of the economic climate. Unlike discretionary retailers selling big-ticket items, Card Factory benefits from consumers’ reluctance to skip small, sentimental purchases, even during downturns. This resilience was evident in the firm’s performance during recent economic challenges.

While rising energy costs, freight inflation and National Living Wage increases have pressured margins, Card Factory has offset these through targeted price increases and tight cost control.

Card Factory's remarkable dividends

The only time Card Factory genuinely faltered was during the Covid pandemic, when high-street footfall plummeted. The company took a brutal hit. Dividends have been a hallmark of Card Factory’s shareholder-friendly policy since its 2014 flotation, but they were suspended during the pandemic.

The recovery coincided with a return to normality. By 2023, sales had surpassed pre-pandemic levels. Store transaction volumes, while still below pre-pandemic levels, have rebounded strongly, driven by high-street footfall and click-and-collect services. Online sales, although slightly down post-reopening, remain significantly ahead of pre-pandemic figures, reflecting a lasting shift in consumers’ behaviour. Most tellingly, Card Factory reinstated its dividend in 2024, declaring an interim payout for the first time in five years, a clear signal of confidence in its cash flow and long-term outlook.

Despite this turnaround, Card Factory’s shares remain extraordinarily cheap for a business with stable revenues and reinstated dividends. Even in a UK market brimming with undervalued small-cap stocks this valuation stands out and, with a high dividend pay-out, investors earn a return even while waiting for the market to wake up to the potential.

Card Factory’s growth prospects add to its appeal. The firm is expanding, with new openings planned, and it is enhancing its online platform. A recent $25 million acquisition of Garven, a US-based card retailer, signals ambition to tap the potentially lucrative US market, although investors are watching closely for its financial impact. Partnerships, such as with Aldi, and a focus on higher-ticket items such as balloons and party supplies, are expected to drive revenue growth of 5%-7% annually over the next few years.

No investment is without risks. Card Factory’s reliance on physical stores makes it vulnerable to shifts in consumers’ behaviour.

Inflationary pressures, especially in freight and labour, could continue to squeeze margins, and the company’s debt pile, while manageable, requires careful monitoring. Yet these risks seem more than priced into the current valuation. With a strong cash flow and a diversified revenue stream, Card Factory is well-positioned to navigate challenges. Its ability to outperform competitors in key trading periods, such as Valentine’s Day, underscores its market strength.

Card Factory may not be glamorous, but its resilience makes it a compelling opportunity. Its recovery from the pandemic has been robust, with revenues above pre-pandemic levels and dividends back on the table. Trading at a historically low valuation, with decent forecast growth, the shares are a bargain in a market full of cheap stocks.

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Nothing can stop silver, it seems. Not even the $50-an-ounce mark. The price of $50/oz is the all-time high for silver. It reached that level in 1980, then again in 2011, but it’s never been able to get past it. It’s hard to think of any price in any market that is as psychologically significant a barrier as $50 silver. And yet this week silver sailed through it.

We might even have a supply squeeze on our hands – you get them in the silver markets every now and then. Demand from investors has shot up with the recent price surge, creating a shortage in London (where supply was already tight). Lease rates – the cost of borrowing the metal – have jumped by up to 30% in recent days.

Bid-offer spreads have risen from a typical three US cents to 20 cents. The spread between the London spot price and the Comex future price typically sits at minus 30 cents/oz. Suddenly, it’s $3/oz and silver has gone into backwardation: the spot price is now higher than the price of the future. That happened in 1980 as well, as silver was rocketing. By the way, if you adjust that $50 silver price for inflation, you get a figure around $200/oz for silver. Just in case you wanted an idea of what’s possible.

The backwardation has prompted traders to fly 1,000oz bars from Comex vaults in New York to London. The price gap justifies the transport costs, and remember: silver is bulky compared with gold. It is not cheap to fly.

Why such a shortage of silver? The market has been in deficit for five years, meaning demand has exceeded supply. The shortfall is around 150 million ounces annually, with London’s stock down by a third since 2021. Annual global silver production from mines peaked in 2016 at 900 million ounces. It’s been in the 830-860 tonne range ever since.

A surge in demand for silver

The major factor affecting demand has been solar panels. Until 2021, demand for silver in photovoltaic cells consistently remained below 100 million ounces per annum. Now it’s close to 250 million ounces. With the world electrifying, this appetite is unlikely to subside.

What’s interesting is that demand from exchange-traded funds is still below 2021 levels. In other words, investors are not fully committed yet. There is room for greater investment demand, and that puts further upward pressure on price.

What adds yet more potential rocket fuel to the price is the absurd levels of paper silver – something I have never fully been able to explain, although I am reluctant to cry manipulation as many do. But there are something like 360 paper contracts for every physical contract, and that has the potential to cause a short squeeze if paper contract holders request physical delivery. It happened in 2011 when silver went to $50. It happened in 1980, too.

Remember, silver tends to move later in bull markets and by more. We are seeing that now. A recent poll I ran on X showed that while gold is widely agreed to be in innings six of nine, silver is perhaps not even in innings three. I put that down to excessive bullishness among silver bugs. The market has been rising since 2022. Just quietly. Still, you can’t be too bullish in a bull market. It’s recognising when it’s over – that is the skill.

Chartists point out that the cup-and-handle pattern is regarded as extremely bullish. Silver has traced one out over 50 years. Typically, you would set a target matching the height of the cup: the distance from the bottom of the cup ($4) to the rim: $46. That gives us a target price of $96. Lord knows what price that means the miners would go to.

Don’t get carried away with silver

But remember, this is silver. If it can find a way of letting you down, it will. I’ve covered this market for 20 years. It is characterised by years of bear market, years of waiting, years of nothing but losses, punctuated by occasional spikes of hope. We are enjoying one such spike now.

Everyone’s saying this time it’s different. I don’t doubt that this bull market has legs. But it’s still silver. Don’t get carried away. There are many reasons to own silver. But be clear why you own it – and don’t own it for the wrong reasons.

Silver is not the same as gold. Yes, it was once a monetary metal, although its main purpose was as a medium of exchange, not as a store of wealth – just as gold’s main purpose was more to be a store of wealth rather than a medium of exchange. Central banks, institutions and individuals still use gold as a store of wealth today. They don’t use silver. Yes, some of us have silver coins and bars; there are the ETFs, but silver has nothing like the significance that gold does in this respect. Meanwhile, silver’s role as a medium of exchange is long gone.

Silver remains a beautiful, captivating, magical metal with a plethora of uses. Demand for silver will only increase as we make more mobile phones, computers, batteries, medical devices and, of course, solar panels (the most rapidly growing source of demand). The market, as I say, has been in deficit for five straight years, causing above-ground stock (mainly from recycling) to run low.

With that extraordinary paper-to-physical ratio of 361 contracts for every physical ounce of silver, bubbling under the surface is always the potential for a huge short squeeze as dealers scramble for physical metal to honour paper contracts. This happens occasionally and seems to be happening now. But it is not a permanent state of affairs.

The gold/silver ratio

There is 15 times as much silver in the ground as there is gold, and this historical monetary ratio between the two was always around 15. This has led many to argue that we will return to that ratio at some point. If gold remains around $4,000/oz, then silver would be $266/oz. But that ratio is not coming back, because silver’s role as money is not coming back. Don’t be under any illusions. The only chance of us ever reaching a ratio of 15 is on a spike, such as we saw in 1980, but things will quickly revert. Currently, the ratio lies at 80.

The price action of silver is unlike any other metal. In the 1970s, it meandered around $5/oz, then suddenly exploded to $50 as the Hunt brothers tried to corner the market. It then collapsed and spent the next 25 years meandering around the $5 mark again. Things picked up after 2004. There were huge spikes and dips as it launched to $50/oz once again in 2011. Then it crashed again. It traded in a range between $15 and $30 for another decade, but then, largely riding on the coat-tails of gold’s bull market – roughly since the US froze Russian dollar assets – silver has been creeping up and up and up.

Silver at $50 is a huge line in the sand. Maybe this is a genuine breakout, maybe not. But we are now at $52. There is no resistance overhead. Typical price action would be for us to rally a bit more, pull back to the breakout level, retest, then off to new highs. That’s when we start heading towards those cup-and-handle highs. I don’t think $100 silver is an impossibility. But I shall be lightening up as we rise.

My favourite silver play, my largest silver position and one I have covered before is Sierra Madre Gold and Silver (Canadian Venture Exchange: SM). Some Flying Frisby and MoneyWeek readers got into this one a couple of years ago below 30 cents. It is now sitting majestically at C$1.45. It can go higher. If silver hits $100, this could become a 10-dollar stock.

Where to invest in silver now

This Canadian-listed company, with a market value of C$270 million, has a producing mine in Mexico, La Fortuna, which it acquired from silver mining giant First Majestic (NYSE: AG). First Majestic had put it under care and maintenance during the bear market.

While the quality of the asset was not in doubt, it was deemed too small for a company of First Majestic’s size to bring back into production; hence the partnership with Sierra Madre. Sierra Madre spent several years putting it back into production, meeting most targets ahead of schedule, although its cost per ounce was higher than anticipated at $30/oz.

Full-scale commercial production began in January 2025. Production currently stands around 700,000 ounces per annum. There are also several potential catalysts for the stock. Firstly, production costs will come down from $30/oz to about $21 over the next two years as the group replaces rented equipment with its own, increasing efficiency and turnover.

The company also processes between 300 and 350 tonnes of rock per day. Recent investment in the business means improved equipment, and processing will rise to 750-800 tonnes by the second quarter of next year. Production will double, in other words. The miner is aiming to double that figure again by late 2027. Remember, this company has a habit of reaching its targets, which is unusual in the sector.

The La Fortuna mine is projected to have at least 15 years of life. But the bulk of this stock’s potential comes from exploration. There are many past producing mines on the property (most closed in the early 20th century), which produced more than a million ounces of silver annually. Geologic mapping has identified 60 kilometres of mineralised veins. The group also has multiple historic resource reports, one showing 200 million ounces in the 1990s, which never materialised due to the bear market. There is plenty of metal there, in other words.

“This is why we bought the property,” CEO Alex Langer tells me. It could be “the largest undeveloped silver district in Mexico”. Exploration begins next year. First Majestic had plans for a mill to process 3,000 tonnes of rock per day at one of the properties. So why didn’t it explore the property itself? Because it owns a huge stake in Sierra Madre (38%), so it can sit back and let Sierra Madre do the work.

The goal is to grow what was a development play, now a junior producer, into a mid-tier silver producer. The expansion plans are coming just as silver is rising. It feels like just the right point in the cycle.

If the company produces silver at $30 and the silver price rises from $40 to $50, profits double. If production costs come down to $20 and the silver price rises to $60, they double again. If production itself doubles, profits double again. If the silver price goes to $100 and this firm makes a major discovery and turns itself into a district-scale producer, then this becomes an asymmetric bet.

Flying Frisby and MoneyWeek readers who got into this one at 30 or 50 US cents may be tempted to take some profit. But there is every reason to carry on holding. Ultimately, this miner sinks or swims with the silver price, but even if silver just stays where it is there is still enormous potential for growth.

Dominic Frisby is the author of The Secret History of Gold: Money, Myth, Politics & Power, available at all good bookshops. He writes the investment newsletter The Flying Frisby: theflyingfrisby.com.

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Emerging markets are full of opportunities – not just the mega-caps that dominate headlines, but also the lesser-known innovators quietly shaping the future. At the Mobius Investment Trust, we think these “under-the-radar” firms offer some of the most exciting potential for long-term investors.

Our forward-looking, quality-driven approach is built on proprietary research, which should allow us to access promising opportunities overlooked by the mainstream.

In Asia in particular, the opportunities are compelling. India is benefiting from very rapid digitisation, momentum behind government reforms and a young, middle-class population. Taiwan sits at the heart of supply chains for global technology ranging from semiconductors to next-generation AI infrastructure.

South Korea, meanwhile, combines world-class innovation with ongoing improvements in corporate governance. Together, these markets provide fertile ground for finding companies with sustainable earnings, competitive advantages, and the resilience to navigate changing market dynamics.

With an active share of more than 98%, our portfolio looks very different from the benchmark. This differentiation should allow us to capture growth stories others may miss, while our active-ownership approach means we work hand-in-hand with companies’ managers to help drive improvements in operations, governance and sustainability.

To illustrate our approach, here are three examples of the kinds of companies we aim to invest in: innovative businesses with distinct market positions and exposure to long-term growth trends.

Three emerging market stocks to watch

E Ink (Taipei: 8069) is best known as the company behind the e-paper screens in e-readers such as the Kindle. The group has a near-monopoly in this niche technology. Beyond e-books, it is powering a wave of electronic shelf-labels in retailers, helping stores reduce labour costs and enable dynamic pricing. With only a fraction of the potential market penetrated and thousands of patents protecting its technology, the potential for long-term growth is significant.

CarTrade (Mumbai: CARTRADE) is a leading asset-light online platform for buying and selling vehicles in India, covering everything from cars to two-wheelers. With car ownership still low but rising quickly, and the demand for used cars accelerating, CarTrade benefits from powerful long-term trends. Its move towards high-margin online classified advertisements, including OLX, a global platform, has boosted profitability. Furthermore, the business is debt-free with a strong record of growth.

Park Systems (Seoul: 140860) is a pioneer in atomic-force microscopes, tools that allow semiconductor companies to inspect surfaces at the nanoscale. As chips become smaller and more complex, such precision is essential. Founder-led with deep academic roots, Park Systems has carved out a first-mover advantage and is well-positioned to expand alongside rising global demand for advanced semiconductors.

These are just three examples of the kinds of businesses we focus on: innovative, high-quality companies in dynamic markets, often overlooked by the mainstream, but with the potential to deliver sustainable growth over the long term.

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There are not many world-leading technology companies listed in London anymore, but one of those still remaining is Pinewood Technologies (LSE: PINE). Until 2024, the company was better known as Pendragon, one of the UK’s largest owners and operators of car dealerships under the Evans Halshaw and Stratstone brands. These divisions overshadowed what was a gem of a tech platform hidden under the bonnet.

Pendragon sold the physical side of the business for nearly £400 million at the beginning of 2024 to the US dealer group Lithia & Driveway. The deal made a lot of strategic sense, considering the platform’s profitability and potential. In the 13 months to the end of January 2024, just before the deal was completed, the discontinued operations generated £4.3 billion in revenue and a profit before tax of £81.6 million, a profit margin of around 2%. The software side of the business reported revenue of £24.5 million and a profit before tax of £9.9 million, a margin of 40.4%.

Legacy tech at Pinewood Technologies

Pinewood’s software arm has been in operation for some time. It was founded in 1981 with the launch of the complete automotive record system (CARS), created to help dealers manage various aspects of their operations. The software was designed to streamline the entire process, from prospecting and vehicle management to workshop and parts management, and accounting, utilising a central database that employees not trained explicitly in complex software would find easy to use.

This so-called dealer management system (DMS) was initially sold as a cost-effective way to manage an operation, effectively eliminating the need for at least one person in each department. It also helped smooth the relationship between franchised dealers and manufacturers, as manufacturers could use the system to maintain control over their franchisees. It’s much easier to control the product when the management is done via an easily accessible piece of software that’s used by hundreds or thousands of other outlets.

Pendragon initially acquired the software in 1998 for £2 million. The business started off with 17 staff and three years later the workforce had grown to 90. Pendragon was a customer of Pinewood when it acquired the company and in the following years utilised its capital and scale to drive an aggressive expansion. In 2001, Pinewood won a contract to supply the DMS system to Ford’s 744 UK car dealerships, with an agreement also to take the software into Europe.

However, one of the problems of the integrated business was the fact that, however good Pinewood’s software was, it was always going to be part of one of the largest dealer groups in the country, a point of contention in what can be quite a competitive market. As a standalone business, the group has the freedom to pursue customers across the UK and global markets without any concerns about competition.

For example, in October last year Pinewood announced it had entered into a five-year contract with Marshall Motor Group to implement its software. Marshall is one of the largest franchise dealer groups in the UK, with 120 dealerships, and is part of the Constellation Automotive Group (which owns the likes of We Buy Any Car). It was the first non-associated major dealership group to adopt the firm’s software since Lithia acquired its physical business, putting the software in four of the top-20 UK dealer groups.

As part of the deal with Lithia, Pinewood agreed to establish a joint venture in North America, with pilots set to start in 2025. The agreement was billed as a way into the $6.5 billion vehicle-systems market in North America by gaining a foothold in over 300 dealerships owned by the joint-venture partner. In mid-2025, Pinewood agreed to acquire the 51% stake in the joint venture it did not already own. The joint-venture stake was valued at $76.5 million on an independent basis, and Pinewood funded the acquisition through the issuance of 14.6 million new shares to its former partner, with the latter entering into a five-year contract to roll out the software by the end of 2028. The rollout is expected to generate annual recurring revenue of $40 million by 2028, and could rise to as much as $60 million.

Pinewood Technologies: growth ahead

Pinewood has been in transition for the past two years, and it’s now primed to grow rapidly. The company outlined medium-term guidance alongside its fiscal first half of 2025 results last week, suggesting underlying Ebitda would hit between £58 million and £62 million in fiscal 2028, implying a 56% compound annual growth rate.

Revenue was up 21.7% in the first half of the year and 85.7% of total revenue is recurring, with net user churn at just 0.3%. The company’s gross margin declined slightly, but only to 86.7%, down from 90% in the prior period, although analysts at Berenberg believe it’s only a matter of time before it returns to 90%. The acquisition of technology group Seez in March is expected to enhance the company’s AI capabilities and accelerate vertical sales.

Sadly, Pinewood’s growth story is well known, and the stock is not cheap. It is trading at a forward price-to-earnings (p/e) ratio of 74.7. But what the company lacks in value, it makes up for with growth. Berenberg has the company trading at a p/e multiple below 20 by fiscal 2028, but more interestingly, the free cash-flow yield is expected to trend up into the high single digits, hitting at least 7% by fiscal 2027. Analysts also believe the company will have accumulated £94 million-worth of cash on the balance sheet at this stage, compared with the market capitalisation of £513 million. In other words, it’s clear this is a highly cash-generative, cash-rich business with a long runway for growth over the coming years.

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In 2026, the FTSE 100 index is likely to pass 10,000 for the first time thanks to the onward march of corporate earnings around the globe. UK investors have been remarkably reluctant to invest despite the relentless rise of equity markets: two-thirds of all ISA savings are in cash ISAs, and two-thirds of savers believe that investing is too risky.

With investors starting to discount a change to a more business- and stock market-friendly government, savers’ risk aversion should start to decline, even if the domestic economic outlook remains dismal and fears of a fiscal crisis are widespread.

Investment trusts tend to outperform a rising market, especially when, as now, there is scope for discounts to net asset value (NAV) to fall. They currently average more than 14%. Savers, whose real returns are being squeezed between falling interest rates and persistent inflation, need to cast aside their regret about missed opportunities and take the plunge. Fear about short-term volatility should not be a deterrent to the long-term returns that equity markets offer.

Where to start with UK equities

A good place to start is with the MoneyWeek portfolio, which includes two contrasting, but complementary investment trusts: the £13 billion Scottish Mortgage Investment Trust (LSE: SMT) and the £1 billion AVI Global Trust (LSE: AGT). Both invest globally, but SMT is very much a growth trust while AGT invests in value.

The five-year investment record of SMT is miserable at 27% against a 75% return from the MSCI All Country World index. But this includes the disastrous year to June 2022 when NAV fell 39% and the share price 46%, while the index fell less than 5%. This followed five years in which the NAV more than quadrupled while the index less than doubled, arguably making the managers overconfident.

After reaching a low in May 2023, both the NAV and the share price started to recover. The share price has almost doubled since then, helped by a narrowing discount to NAV as SMT has aggressively bought back shares. In the year to 31 August, both the share price and the NAV have returned 34%, compared with just 13% for the index, but the shares still trade on an 8% discount to NAV.

AGT has charted a much steadier course, with an investment performance of 90% over five years, but only a respectable 12% over one. The share price dropped 15%-20% in a couple of months earlier this year, but its moderate overall volatility and good performance explain the 6% discount to NAV at which the shares trade.

SMT “aims to identify, own and support the world’s most exceptional growth companies”. It recognises that many of these are not quoted, because private capital is more readily available than in the past, so companies are coming to the market later in their development. It believes that great opportunities would be missed or invested in unnecessarily late if it restricted itself to public equity. Private equity is limited to 30% of the portfolio, and this limit was a problem in 2021-2022 when the share prices of its quoted company holdings fell fast, and a widening discount of its shares to NAV resulted in pressure to buy back shares. Now, private equity comprises 26%, invested in 51 companies. This includes Space Exploration Technologies, the largest holding at 7.8%, Elon Musk’s venture that includes Starlink.

Also unquoted is ByteDance, the owner of TikTok and the sixth-largest holding at 3.5% of the portfolio. The remaining 73% of the £15 billion portfolio, excluding 1% of net liquid assets, is in 47 listed holdings, the largest of which are MercadoLibre, Amazon, Taiwan Semiconductor and Meta. Borrowings of £1.6 billion, 11% of net assets, imply optimism about the outlook, but will also constrain further investment.

Contrasting investment trusts

Portfolio turnover, at 9%, is low; SMT’s philosophy is to run its winners. It has multiplied its money 100-fold in Nvidia (a top-10 holding) and 21-fold in Tesla (now sub-1%). But it owns up to seven investments in the last decade, on which it has lost everything. Its managers note that you can multiply your money on a good investment, but only lose it once on a bad one.

AGT’s expectations on each investment are much more modest on the upside and much less phlegmatic on the downside. Its approach to value is very different from just seeking cheap or recovery shares around the world. Around 40% of the portfolio is invested in holding companies, usually family-controlled, where the whole is valued at much less than the sum of the parts. Examples include the media and entertainments groups News Corp, controlled by the Murdoch family, and Vivendi, controlled by Vincent Bolloré.

There is significant underlying growth in these companies, but investors suspect the controlling shareholders of being empire builders rather than value creators, hence their undervaluation. Another 31% of the portfolio is invested in closed-end funds trading on significant discounts to NAV, such as Chrysalis, Oakley and HarbourVest (all private-equity specialists). Again, there is significant underlying growth in these investments, but investors are sceptical.

The final 29% of the portfolio is invested in Japan (21%), Korea (6%) and property/other (2%). AGT saw a significant opportunity in Japan around 10 years ago with a large number of companies trading at very low valuations relative to assets, and their managements both complacent and uninterested in outside investors.

Prime minister Shinzo Abe (2012-2020) introduced reforms to shake up the corporate sector and these slowly bore fruit. In 2018, AVI launched a separate trust, AJOT, to specialise in value investing in Japan, but Japan has continued to be an important and successful focus for AGT. This year, Korea introduced similar corporate reforms, which encouraged AGT to invest there. It has identified 600 companies trading at a median price-to-book ratio of 0.7 and a median of 71% of their valuation in cash and listed securities, so the opportunity is significant.

Why pick both investment trusts?

AGT is not a traditional activist investor. Rather than a hostile approach in a blaze of publicity, it seeks to persuade company managements to realise value for shareholders. It is prepared to write open letters to management, to engage with other shareholders and to be patient, although a 36% gain after four months of holding Jardine Matheson shows that this is not always necessary.

AGT’s debt-to-net-asset ratio of 9% is similar to SMT’s, but only 16% of the portfolio is invested in North America, compared with 55% for SMT. Its portfolio is much less technology-orientated than SMT’s, but much more growth-orientated than a traditional “value” portfolio. AGT and SMT can be compared to the tortoise and the hare, but unlike in Aesop’s fable it’s not clear who the long-term winner will be. Markets and momentum now favour SMT, while AGT progresses steadily – but fortunes can change. That is why MoneyWeek’s investment-trust portfolio contains both.

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At Odyssean Investment Trust we seek to invest in high-quality UK businesses trading below their fundamental value, with scope for that value to grow through proactive management action. One area where we have been active recently is an unglamorous part of the market: British small-cap industrials.

The UK industrials sector is overlooked and unloved. Investors often conflate “industrials” with visions of grubby metal bashers serving a diminishing manufacturing base. In truth, this sector is highly diverse, and for those prepared to look, you can find a number of first-rate, globally-focused businesses with exciting growth prospects.

To find the gems in industrials, we look for three key attributes. First, the most attractive companies utilise their own intellectual property in their products or production processes, allowing them to be global leaders within a niche. Expertise that is hard to replicate creates a significant economic moat to underpin any investment.

Second, while industrials can be cyclical, many companies enjoy exposure to long-term growth megatrends such as AI spending, renewables investment or growing demand for healthcare. Short-term swings can often hide longer-term secular stories, offering opportunity for the patient investor.

Finally, industrials businesses can be complex: managing production, ongoing research and development (R&D) and an evolving demand environment are not easy. High quality management can add significant value; backing proven, experienced teams is crucial.

Three British industrial stocks that are powering profits

XP Power (LSE: XPP) fits our criteria nicely. The business is a leading designer and manufacturer of power supplies that enable high-technology applications across industrial, healthcare and semiconductor end markets. It uses its world-leading expertise to design power supplies that meet the needs of the most demanding cases.

The group has a strong track record across the cycle, benefiting from growing demand for semiconductor-manufacturing capacity – a trend set to continue given current geopolitical and AI demand drivers. Led by a proven team who have delivered strong operational control through the recent cyclical downswing, this stock’s long-term potential is overlooked by the market.

Another emerging UK industrials champion is Xaar (LSE: XAR). The company manufactures ink-jet printheads with unique technology that allows the deposition of high viscosity fluids at high accuracy for a range of industrial applications. Based on intellectual property developed over many years, the group’s print heads are sold globally and are the core component of its customers’ printing machines.

The group is active in a number of sectors, but under its current leadership has recently used the unique abilities of its technology to open up markets previously unaddressed by ink-jet deposition solutions. These new opportunities offer a route to long term growth regardless of shorter-term market cycles and, we believe, herald an exciting future for the company.

Another UK-based industrial with a niche, global leadership position is Dialight (LSE: DIA), a leading provider of LED lights used in hazardous industrial environments. The group’s design expertise allows it to offer industry-leading reliability, critical for the extreme, niche-use cases it serves.

LED lighting continues to gain share from traditional alternatives given its higher reliability and lower power usage, providing a tailwind of growth for the group across economic cycles. After a tough period, Dialight has been rejuvenated in recent years under a new leadership team with proven experience of driving value at industrial businesses. We believe it is one more of the gems in UK small-cap industrials.

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For decades, alcoholic drinks businesses have been prized by investors for their remarkable consistency. These were companies built on enduring brand value, deep-seated customer loyalty and seemingly unshakeable demand. This made them a reliable bedrock in many a portfolio. This is changing. What were once considered dependable investments have, over the last few years, delivered substantial losses. In the UK, Diageo has long been hailed as the cornerstone of quality-titled portfolios. Yet investors who bought shares in early 2021 are now sitting on losses of around 50%. The pain is acute, but Diageo’s slump is merely a microcosm of a sector battling on multiple fronts.

Elsewhere, the damage is even more dramatic. Brown Forman, the family-controlled owner of Jack Daniel’s, has lost about two-thirds of its market worth. This left shareholders needing a 200% rally just to get back to previous levels. Among the global brewing businesses, only Asahi escaped the mania for “quality” equities that flourished while interest rates were at rock-bottom levels. And what of the largest of them all, AB InBev? The owner of Stella and Budweiser has generated a moderate five-year total return. Yet even this giant is a lamentable investment over any meaningful time horizon. The shares sit at roughly half their 2015 peak.

The broader market has seen a re-evaluation of “quality” stocks, with higher interest rates making risk-free returns far more attractive. But the industry’s problems go beyond the economic cycle. Structural shifts are changing the way people drink. This is hitting the bottom lines and valuations of its biggest businesses.

A confluence of challenges facing the alcohol industry

The industry is contending with four interconnected headwinds that are collectively dampening demand and forcing a strategic rethink across boardrooms globally. These range from drug usage, both recreational and pharmaceutical, to altering attitudes to health.

First, the liberalisation of certain narcotics, most notably marijuana, is creating a direct substitution effect. In Canada, for example, alcohol sales have seen a discernible decline following the legalisation of adult-use cannabis, with Nova Scotia experiencing an initial 2.2% dip. Statistics Canada further corroborates this, reporting declines in alcohol sales during 2023-2024, whilst adult-use cannabis sales simultaneously rose. Sixty per cent of cannabis users admit to consuming the substance to reduce their alcohol intake. This trend is particularly impactful on beer sales, whereas spirits sales remained largely unaffected. In US states such as Colorado, Washington and Oregon, post-legalisation beer sales fell modestly while spirits sales actually rose.

Second, younger generations are simply drinking less. Generation Z, those born between 1997 and 2013, has been dubbed “sober curious”, and with good reason. Their alcohol intake is far lower than that of older cohorts. Millennials (1982–1996) were already drinking less than Gen X and the Baby Boomers, but Gen Z has pushed the trend further. Many are actively rejecting alcohol in favour of wellness, mental health and balance. In the US, around half of Gen Z adults (21+) are reported to have never had a drink. Those who do tend to consume only occasionally or in moderation. Concerns about health, sleep quality and mental wellbeing are all part of the shift. The boom in “mindful drinking” and in low- and no-alcohol alternatives is a direct response to Gen Z’s demand for healthier ways to socialise without the downsides of heavy drinking.

Third, governments are using alcohol duty both to raise revenue and to change behaviour. Research shows a clear link between price and demand. When prices rise, consumption falls. A 10% price increase is estimated to cut demand by about 5%. In the UK, stronger drinks now face higher rates of duty. Australia applies a “wine equalisation tax” and excise duties on beer and spirits; both are tied to alcohol content and adjusted twice a year for inflation. Canada has an annual “escalator tax” that rises with inflation. As a result, taxes make up around 50% of beer prices, 65% of wine and 75% of spirits. These measures hit high-alcohol by volume (ABV) products the hardest, creating serious pressure for producers and the hospitality trade.

Finally, the rapid rise of GLP-1 weight-loss drugs such as Ozempic and Wegovy is a new threat to the alcohol industry. These medicines were first developed to treat type 2 diabetes. They are now widely used for weight management. Evidence suggests they also change behaviour. Clinical trials and anecdotal reports show they can reduce alcohol cravings. A 2025 study by the University of Southern California found that patients on semaglutide, the key ingredient in Ozempic, drank less often, consumed fewer drinks and were less likely to binge. Another 2025 study, from University College Dublin, showed regular drinkers cut intake from 23 units a week to just eight, a fall of more than 65%. GLP-1s copy a natural hormone that controls appetite and blood sugar. They also affect the brain’s reward system, making alcohol and food less appealing. The impact goes beyond alcohol. Users report eating fewer snacks, consuming less sugary drinks and avoiding other impulse purchases. That could hurt drinks firms and any business that relies on indulgence.

Which segment of the alcohol industry is most vulnerable?

The impact of these trends is far from uniform across the industry. Different segments exhibit varying degrees of vulnerability, creating a complex landscape for investors to navigate. Beer is the largest segment, accounting for more than 40% of overall global market share and appears to be the most exposed. Its lower price point and traditional role as a social lubricant make it a more direct substitute for cannabis. Furthermore, younger generations’ shift towards moderation and non-alcoholic alternatives disproportionately affects mainstream beer, which has historically relied on high-volume consumption. While the global beer market is still projected to grow in the years from 2025 to 2030, this growth is expected to be driven mostly by the trend to drink more “craft” and premium brands. This is masking declines in traditional mass-market lagers, which predominate in listed firms.

While also facing headwinds from GLP-1 drugs and progressive duties, spirits demonstrate greater resilience, particularly in their premium and luxury sub-segments.

The global spirits market is projected to continue growing as more parts of the world adopt middle class lifestyles. Consumers are increasingly choosing to drink better, not more, leading to a strong “premiumisation” trend, where higher-quality, often more expensive, spirits maintain, or even increase in, value. This allows spirits companies to command higher price points, offsetting some volume pressures.

Wine occupies a middle ground. Like spirits, it benefits from premiumisation. The global wine market is also projected to grow over the next several years. However, wine can be particularly susceptible to progressive duties, as it often falls into higher tax brackets because of its alcohol content. Tariffs, such as those imposed by the US on European wines, have also demonstrably reduced cross-border sales, with French wine imports falling by 54% in response to 25% tariffs. This highlights its vulnerability to trade policies and specific regional economic shifts.

The non-alcoholic and low-alcohol categories represent a significant growth opportunity and a potential safe haven. As a niche, this market is booming. More people are embracing non-alcoholic beers, wines and ready-to-drink “mocktails”. At the same time, drinks that claim to promote energy, focus or hydration are gaining traction. These trends highlight a clear shift in consumers’ tastes. These products resonate strongly with younger generations and are well placed to capture market share as GLP-1 drugs reshape alcohol consumption habits. Companies proactively investing in, and marketing, these alternatives are best placed to capture this expanding market segment.

Key players in the alcohol industry

The strategic responses, portfolio composition and market exposure of individual companies will dictate their resilience and future share-price performance in this evolving landscape. Anheuser-Busch InBev (NYSE: BUD), as the world’s largest brewer with around 500 beer brands, is the most vulnerable to the substitution effects of cannabis and the broader decline in beer consumption among younger demographics. The company has acknowledged these challenges.

It has also come close to an ambitious goal for its no- or low-alcohol beer products to represent at least 20% of its global beer volume by the end of 2025. The benefits to shareholders are, however, less clear, given the lacklustre performance of the shares. Are its investments driven by a desperate need to defend the business rather than a true opportunity? The company remains heavily dependent on traditional beer and recent brand perception issues present major obstacles. The Bud Light saga is a clear example, in which a controversial, politically correct advertising campaign alienated much of its core customer base.

Diageo (LSE: DGE), an international manufacturer and distributor of premium drinks with approximately 200 brands, is better positioned thanks to its luxury portfolio, including Johnnie Walker whisky and Don Julio tequila. There is a long-term trend of consumers shifting from beer and wine to spirits, which drives value growth for its portfolio. Diageo is expanding its non-alcoholic offerings, having launched Captain Morgan Spiced Gold 0.0% in 2023. It also recognises “zebra striping” – alternating between alcoholic and non-alcoholic beverages – as a key consumer trend. The emergence of GLP-1 drugs remains a potential headwind, leading some fund managers to sell their stakes, most notably Terry Smith of Fundsmith, because of concerns about the entire drinks sector.

Heineken (Amsterdam: HEIA) is the world’s second-largest brewer and owns Amstel, Strongbow and Birra Moretti. It has been an early leader in the low- and no-alcohol (Lono) category, investing and innovating since 2017. Lono products now account for more than 4% of its portfolio, and the company achieved its goal of having a zero-alcohol option for at least one strategic brand available in 90% of its business by the end of this year. Its flagship Heineken 0.0 is the world’s number one non-alcoholic beer brand, and its “0.0 Reasons Needed” campaign directly addresses the social stigma around choosing non-alcoholic options, particularly among Gen Z. This proactive and consumer-centric approach positions it well to navigate generational shifts and the potential impact of GLP-1 drugs.

Constellation Brands (NYSE: STZ) is the largest provider of alcoholic beverages across beer, wine and spirits in the US. Yet it derives a significant 84% of its revenue from Mexican beer imports such as Modelo and Corona. It also has a large number of wine companies in its stable. But the heavy concentration in beer makes it susceptible to cannabis substitution. A key strategic move is its substantial stake in Canopy Growth, a Canadian cannabis producer, representing a direct hedge against declines in traditional alcohol sales.

Pernod Ricard (Paris: RI) is a global powerhouse in wines and spirits, boasting a comprehensive portfolio of more than 240 premium brands. These include Jameson Whiskey, Absolut Vodka, Beefeater Gin and Perrier-Jouët Champagne. Its strong focus on premium spirits positions it favourably to capitalise on the global premiumisation trend. The company has embarked on a significant restructuring programme, aiming for €1 billion in savings by 2029, to streamline operations and cut costs amidst depressed sales. Pernod Ricard faces significant geographical headwinds, with sales of its flagship Cognac brand, Martell, plummeting in China because of anti-dumping duties and shifting consumer preferences. This highlights its vulnerability to geopolitical tensions and regional economic downturns.

Asahi Group Holdings (Tokyo: 2502), a dominant force in Japan’s beer market with a 37% share, is proactively responding to moderation trends by expanding its Lono line-up. As well as Asahi beer, it also owns Peroni, Grolsch and London Pride. The company aims for Lono drinks to account for 20% of its sales by 2030. The group is also making a significant strategic pivot towards wellness and health science, with a long-term vision to become a global leader in “CSV” products – ie, those that supposedly “create shared value”. This will include stepping up investment in pharmaceuticals, health food and cosmetics businesses. This broad diversification offers substantial insulation from direct declines in alcohol consumption.

Carlsberg Group (Copenhagen: CARL B) is a major brewer that is actively addressing the moderation trend. It has set an ambitious goal for its Lono brews to constitute 35% of its global portfolio share by 2030. Currently, Lono accounts for a much smaller fraction of total volumes. A significant strategic move for Carlsberg was the acquisition of Britvic, a British beverage company, expanding its footprint into the broader soft drinks market as a strategy for resilience against shifting dynamics. The company is also a beneficiary of the move towards craft beers. Many of its brands are very small, covering everything from English pale ale to Estonian mead.

Brown-Forman (NYSE: BF.B), known for its Jack Daniel’s family of brands and Woodford Reserve, holds a leading position in the premium American whiskey category. Its strategic focus revolves around portfolio premiumisation. The company has also seen success in the ready-to-drink category, with the launch of Jack Daniel’s and Coca-Cola cans. Operational adjustments, such as a global workforce restructuring plan aimed at generating significant annualised savings, further position it to navigate the evolving market. However, while cost cuts may help in the short term, they do not address the industry’s deeper problems. By contrast, moves such as Carlsberg’s takeover of Britvic go further. Brown-Forman may need to be bolder.

The best bets in the sector

The global alcoholic beverage industry is undoubtedly undergoing a profound transformation. The era of predictable, consistent growth for traditional alcoholic beverages is giving way to a more nuanced and challenging market. The rise of cannabis, the moderation embraced by younger generations, the disruptive influence of GLP-1 weight-loss drugs, and the increasing burden of progressive taxation are collectively reshaping consumer behaviour and industry dynamics.

For investors, the implications are clear: the future success of companies in this sector hinges on their agility, innovation and portfolio management. Those that are proactively diversifying their offerings, investing in premiumisation and embracing the burgeoning non-alcoholic and wellness categories are better positioned to capture new growth opportunities and mitigate risks. This includes expanding into health and energy drinks, exploring strategic partnerships or investments in alternative substances, and adapting marketing strategies to resonate with health-conscious and moderate consumers.

Some companies focus heavily on traditional alcoholic beverages and are slow to adapt to changing consumer preferences. These companies face a risky future. Their revenue and profits will likely face ongoing pressure. This pressure could negatively affect their share values for a long time. To succeed, companies must innovate beyond traditional products. They need to embrace new distribution channels, such as in e-commerce, while navigating complex regulations. The market rewards adaptability and punishes inaction. The industry is rapidly changing, which presents clear challenges. Companies that boldly innovate and embrace new consumer values will thrive. Those strategically repositioning themselves are best suited for our sober-curious world.

Ultimately, investments made in the sector have to be more attractive today than they were at the much higher share prices of a few years ago. The winners of the future are likely to be those who embrace the change rather than shy away from it. This means adapting to a reality of reduced, high-volume, mass-market consumption. Carlsberg starts from a difficult position as a predominantly beer-focused business, but is being very proactive and could be interesting for those who are comfortable with heightened risk. Diageo and Pernod Ricard are already well-positioned for the move towards the “drink better, not more” movement, and both have share prices offering much better margins of safety than in the past. Finally, for those willing to back a smaller business, with a large family shareholding, Brown-Forman looks attractive and has an unusually generous dividend yield for a US-listed company.

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The emerging-market bull isn’t back quite yet, but investors are seriously considering whether to set one running. Despite notable success stories such as India, when taken as a whole, emerging markets (EMs) have had a dispiriting 15 years as surging US stocks left fund managers with little reason to look elsewhere. Between 2009 and 2024, US equities returned an annualised 14.6% in dollar terms, almost double the 7.4% returns for emerging equities over the same period, says Jeff Sommer in The New York Times.

Yet Donald Trump’s tariff chaos has flipped the script. EMs returned a formidable 14.9% in the first half of 2025, compared with 5.8% for American shares. A brief, but frightening meltdown in US bond markets this spring is driving a reassessment of which countries are the real banana republics. The usual pitch for EMs is that they offer high growth potential, but with greater risk. Yet calculations from MSCI show that in foreign-currency terms, US public markets were actually more volatile than the average emerging market during the first half of 2025 (not news to anyone who checked their share portfolio during April’s fierce market crash).

Emerging markets gain credibility

Trump’s America isn’t the only developed nation coming in for scrutiny. “Post-pandemic, many EM central banks were quicker to raise rates than their developed-market counterparts,” says Devan Kaloo, global head of equities at Aberdeen Investments. “By contrast, several developed market central banks have seen their credibility erode, partly due to delayed policy responses and increasingly strained national balance sheets.” There has thus been a shift in “relative credibility”, with incremental improvements for EMs “versus continued erosion” in some developed markets.

The last EM bull market came during the 2000s as Chinese growth powered up global commodity markets. Between 2001 and the end of 2009, the MSCI EM index climbed nearly 200%, compared with a miserable 4% in the developed world (courtesy of the dotcom and subprime crashes). A straightforward repeat of that golden age, with a rising Chinese tide lifting most EM boats, may not be on the cards again. The EM grouping has grown so diverse that differential performance during the next bull run seems inevitable. East Asian tech leaders, Latin American copper miners and Middle Eastern energy plays are unlikely to all enjoy a simultaneous boom.

If anything ties EMs together today, it is the financial logic that sets them up as a foil to US capital markets. When doubt sets in on Wall Street, EM funds are one of the natural outlets for redirected flows, in rather the same way that a local pub might enjoy an uptick in custom when a patron’s marriage starts to fail.

Historically, a fairly reliable rule is that EM assets will rise when the dollar falls. That correlation was apparently driven by simple financial logic: a cheaper dollar meant cheaper financing costs for EM sovereigns and companies. The growth and earnings outlook thus improved mechanically. Yet today firms in the developing world are increasingly able to borrow in their own currencies rather than taking on the currency risk of greenbacks.

You might have expected the inverse dollar-to-EM correlation to break down as a result, but it hasn’t, suggesting that global capital flows are a bigger factor than balance-sheet effects. Buying EMs may thus be one roundabout way of shorting an overvalued dollar.

Emerging market growth

For now, this year’s EM bounce might be more a symptom of global fund managers trimming their US exposure than the result of any sudden enthusiasm for South African miners or Polish energy plays. In the long term, a fresh EM bull market can’t run on fatigue with America alone.

The classic growth themes – a rising middle class, demographics, rapid economic growth – are still present, but they are no longer a given everywhere. Populations in East Asia are ageing, while much of Latin America stews in the middle-income trap. The need to pick winners and avoid duds makes a compelling case for using actively managed funds.

Kaloo highlights “three key structural developments: rising domestic consumption, technology as a platform, and the global shift toward electrification”. To play the first two, he points to Tencent, the operator of Chinese “super app” WeChat. “Tencent combines the strengths of global tech giants such as Spotify, Meta and Sony. Yet it trades at a significantly lower valuation, despite its strong exposure to some of the world’s fastest-growing consumer markets.” For electrification, he likes Kazakhstan’s Kazatomprom, which is the world’s largest uranium producer and stands to gain as “the pace of demand for energy is growing rapidly around the world”.

Another reason to favour funds is because the value created in emerging economies isn’t always captured on local exchanges. Fadrique Balmaseda, investment adviser to the Ashoka WhiteOak Emerging Markets Trust (LSE: AWEM) says that as of June this year, 11.6% of the portfolio is actually in developed-market shares. For example, “approximately a third of revenues” at LVMH and Hermès comes from Chinese luxury consumers, yet the shares are listed in Paris.

To secure broad exposure, there is the Fidelity Emerging Markets Limited Trust (LSE: FEML), which is up 21.5% this year and carries a 0.81% ongoing charge, and the Templeton Emerging Markets Investment Trust (LSE: TEM), which is up 21% and carries a 1.09% ongoing charge. Reflecting the underlying EM index, both are currently heavily invested in Asian tech plays such as Taiwan-based chipmaker TSMC.

Finally, some of the most intriguing growth stories in the developing world are not taking place in emerging markets at all, but in the even more peripheral “frontier” category. The BlackRock Frontiers Investment Trust (LSE: BRFI) offers exposure, with a notable weighting towards the Gulf states and Turkey.

Vietnam: a roaring – and cheap – Asian tiger

GDP per capita in the Southeast Asian tiger has risen more than fivefold since the mid-2000s, driven by an export-led manufacturing strategy. But Donald Trump’s re-election cast grave doubt on the nation’s growth plans. Vietnam has the third-largest trade surplus with the US of any country. When Trump threatened tariffs of 46% in April, local shares reacted with their worst day in 20 years. Economists made dire predictions of GDP shrinking as much as 4% – a severe recession.

Thankfully, last month, Hanoi pulled off a much better deal. The new 20% tariff (with the threat of 40% on Chinese “trans-shipments”) is hardly welcome, but it isn’t at a level that puts local factories out of the game. Most importantly, with its neighbours slapped with similar rates, there is little reason to think that Vietnam’s status as the region’s up-and-coming manufacturing hub is in peril. The local VN-index has rallied 17% since the US deal was announced on 2 July, and has gained 33% in a year. Concern has shifted to whether an “intense” bout of buying by local punters is sustainable, says Nguyen Kieu Giang on Bloomberg. Retail traders account for more than 80% of local market value, partly representing the absence of large institutional investors in a market that is still classified as “frontier” by index providers FTSE Russell and MSCI. Still, on 11.1 times forward earnings, Vietnam remains notably cheap compared with most regional peers.

And the holy grail might be drawing into view. “There are clear signals that an upgrade in FTSE Russell’s index hierarchy could be announced in September 2025, with official inclusion as early as March 2026,” says a recent report from Dragon Capital. That could unleash hundreds of millions of dollars in passive inflows from investors who track the EM index, and several billion from active funds. It could also pave the way for an even more game-changing upgrade to the MSCI EM index. Growth dynamics show no signs of slowing. “FDI, public investment and corporate earnings growth have all surprised on the upside, leading the government to revise its growth target from 8% to 8.5%”, says Thuy Anh Nguyen, director at Dragon Capital. Dragon Capital’s Vietnam Enterprise Investments Limited (LSE: VEIL) fund is tapping into the country’s expanding middle class through electronics retailer Mobile World Group (MWG). With grocery subsidiary Bach Hoa Xanh, MWG is capturing “the shift in consumer behaviour away from wet markets to convenient modern stores”.

VEIL has been London’s top-performing Vietnam-focused trust this year. Dynam Capital’s Vietnam Holding (LSE: VNH), which has more of a tilt towards smaller stocks, has returned an impressive 169% in five years. VinaCapital’s Vietnam Opportunity Fund (LSE: VOF) takes in a broader range of assets, including private equity.

India takes a breather

While Vietnam enjoys clarity over tariffs, India is still caught in the fog of the trade war. The White House has slapped the world’s most populous nation with eye-watering 50% tariffs, with half that total a punishment for buying Russian oil, and the other half in retaliation for New Delhi’s $45.7 billion goods surplus with Washington. A contrarian might spot a buying opportunity. Trump’s tariff bark tends to be worse than his bite. Some sort of deal seems likely to materialise once the sabre-rattling is done. Tariffs are a real irritant, complicating India’s hopes of becoming Asia’s next electronics-manufacturing powerhouse. But a vast internal economy means that only about 2% of GDP is derived from US exports. Trade battles with Washington simply aren’t the existential economic question for New Delhi that they are for Hanoi.

The real problem is that India’s stock market is losing steam. On a forward price/earnings (p/e) ratio of 22, Indian equities trade at a steep premium to the EM average of 13. Indian blue chips generally deserve these premium ratings. India is a tough place to do business, so the firms that rise to the top are usually very well managed.

Moreover, GDP is expanding at 6.5% a year. But high valuations are vulnerable when earnings disappoint, and that is what has happened recently. As Bharath Rajeswaran and Vivek Kumar M note in Reuters, earnings growth has been in single digits for five consecutive quarters, below the 15%-25% pace that got the current bull market going in 2020. There are suspicions that only determined local retail buying is keeping things afloat.

The local BSE Sensex has crawled 2.5% higher this year, lagging regional rivals. In a curious way, Indian shares now resemble those in America: a market with solid long-term prospects, excellent companies and overenthusiastic retail buyers that is losing steam against a backdrop of bad news and elevated valuations. And rather like America, long-term investors cannot afford to sit things out, even if the short-term set-up is less than encouraging.

The pound’s 11% rally against the rupee this year has left most London-listed India trusts underwater for the year to date. Abrdn New India Investment Trust (LSE: ANII) has lagged during India’s equity boom, but its conservative focus on large-cap, high-quality shares should provide some protection during periods of softness. The small and mid cap India Capital Growth Fund (LSE: IGC) has been a top performer, delivering a 171% gain over the past five years. India’s 5,000-plus universe of listed firms is a stern test of stockpicking ability, and with an average annual return of 15.3% stretching back to 2005, the team has a proven record.

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I wasn’t at MoneyWeek when our portfolio of investment trusts was set up in 2012, but the editor tells a funny anecdote. We are famously contrarian, so all six of the trusts originally chosen were “value” plays. Just before the model portfolio was published, someone got a little twitchy. “Shouldn’t we hedge our bets with a bit of growth?” After some huffing and puffing, growth-orientated Scottish Mortgage was added. In the years that followed, this last-minute addition drove almost all of the portfolio’s performance.

The past 17 years have been a tough time to be a value investor. But value actually has a better long-term record than growth. US value stocks have beaten their growth counterparts by an average of 2.5% a year since 1926, according to figures cited in Breakingviews.

Value fell out of vogue in 2008 when the global financial crisis prompted central banks to cut interest rates to ultra-low levels, where they stayed for more than a decade. When interest rates are low, money is cheap to borrow, and companies can invest in future growth more easily. This benefits rapidly expanding firms. Growth stocks raced ahead, and some started to question whether value was dead.

Following a pandemic, war in Europe and a period of high inflation, the post-2008 era is well and truly over. “It’s difficult to predict exactly where interest rates or inflation are going to be over the next few years, but it does feel sensible to say that on average they will be more of a feature,” says Beth Shard, deputy fund manager at Invesco. “Surely in a world where money isn’t free, the price you pay for something must matter.”

Finding value: what is value investing?

Value investors buy stocks that are trading at a discount to fair value in the hope that the share price will catch up. The idea is to buy a pound of assets at, say, 60 pence. Analysts value companies by looking at data such as earnings, book value and cash flows. Warren Buffett, the world’s most famous value investor, once said: “Price is what you pay; value is what you get.”

There could be many reasons why a stock is trading at a discount. Perhaps the firm is in a sector that has become unfashionable, or investors have overreacted to some bad news. The trick is to identify companies that are unfairly undervalued rather than those that are cheap for a reason, otherwise known as value traps.

Finding the catalyst for a rerating is also important. Perhaps the company’s management team has changed, or a new business strategy is being implemented.

“There’s no point just buying something cheaply and then hoping for the best,” says Joe Bauernfreund, manager of the AVI Global Trust. “Very often, it’s shareholder activism that really is the driver there.”

Going for growth: what is growth investing?

Growth investors buy shares in companies that are rapidly expanding. They are often more expensive than value stocks, as investors are paying for future potential rather than current earnings. Growth companies don’t tend to pay large dividends, as profits are generally reinvested in future projects.

Some of the most famous growth companies are in the technology sector: the likes of Nvidia, Meta and Tesla. All three are investing huge sums today in the hope of emerging as the winner of the AI race tomorrow.

Low interest rates favour growth stocks because of the way companies are valued. Analysts discount future cash flows to account for the time value of money: money today is worth more than the same amount tomorrow. When interest rates are low, so is the discount rate, increasing the value of future cash flows.

Is the pendulum swinging back?

Value investors have been talking about a style rotation for years. Given that interest rates started rising in late 2021, shouldn’t it have happened already? We did see some initial signs in 2022, when the tech boom went into reverse. The Magnificent Seven shed 40% of their collective value that year as central banks hiked rates. Share prices quickly bounced back, though.

Things could be starting to shift again now. Data from investment research company Morningstar, focused on over 800 global large-cap funds, shows that value has outperformed growth so far this year for the first time since 2022. Value funds are up 14%, while growth funds are up around 10% (July 2025).

“The value resurgence has been driven by a couple of key factors,” says Mark Preskett, senior portfolio manager at Morningstar Wealth. “Firstly, global value funds tend to hold a bias towards emerging-market and European companies, which have both handily outperformed the US this year.

“Secondly, value funds tend to overweight stocks in the financial services sector while running an underweight to the technology sector. In 2025, the two sectors have shown a sharp divergence in fortunes, with financial stocks among the best performers year to date.”

Things look different when you examine the US market in isolation. US growth funds are still outperforming value, as US tech stocks have rebounded strongly in recent months. Meanwhile, healthcare – a sector often favoured by value investors – has struggled. Despite this, there is a sense that sentiment is now shifting.

“You’ve got this... tension,” Bauernfreund says. “There is this ‘buy the dip’ mentality, but on the other hand, you’ve got more sophisticated investors worried about valuation. Coupled with what’s going on in the US politically, they have started to look elsewhere.”

One key beneficiary has been Europe, which looks cheaper than the US. Investors pulled £622 million from North American funds in May following the Liberation Day turmoil, according to the Investment Association. Meanwhile, European funds saw inflows accelerate to £435 million.

The latest data shows North American funds returned to modest inflows in June (£52 million), but Europe still outpaced the US with inflows of £198 million. Time will tell whether this develops into a sustained trend, but mounting interest from investors could create a tailwind for value-oriented markets.

The UK offers good value in a global context. The FTSE All-Share is trading at 13 times forecast earnings, compared with 23 times in the US, according to recent data shared by Fidelity International. “Should the US market trade at a premium to the UK?” asks Alex Wright, manager of Fidelity Special Values. “I think it should, because of the much larger technology weight. But I think that gap is too large.”

The UK also looks cheap compared with its own history. Fidelity data shows the FTSE 100 is trading at a 10% discount to the average forward price/earnings ratio since 1998. That discount gets larger as you move down the market-cap spectrum.

It is perhaps unsurprising. The UK has been unloved since Brexit. Even before 2016, there was a problem with institutional investors pulling money from the domestic market. Pension funds and insurers have gone from owning around half of the UK market in the 1990s to just 4% today.

Back to Blighty: do UK equities offer good value?

The outlook now seems to be improving. “I think they’ve pretty much sold all they needed to sell,” says Simon Gergel, manager of the Merchants Trust. Policymakers are also encouraging pension funds and private investors to put more of their money into the UK, which could help over the long run. Gergel says the government and regulator are singing from the same hymn sheet for the first time in his 35-year career.

There are also some big buyers in town. International private-equity firms have been taking the opportunity to shop around in bargain Britain, snapping companies up at a discount. Shard thinks more of this activity could help “shine a light on the value on offer here”. Management teams clearly recognise the value in their own stock too. There has been a record amount of buyback activity in recent years.

Stock market turnarounds are famously difficult to call until they have already happened, but so far this year, UK performance has been strong. The FTSE All-Share is up more than 13%. Wright doesn’t think the UK market as a whole will grow its earnings in 2025, partly because dollar-earners will be hurt by currency effects when converting holdings back to sterling.

However, there are still opportunities to be found. For the companies in his UK equity portfolios, he is forecasting 6% operating profit growth in 2025, 11% in 2026, and 9% in 2027. With this sort of earnings growth and dividends on top, “we don’t actually need there to be a rerating to produce very good returns”.

Where to invest

From a regional perspective, the UK is worth a look. Fidelity Special Values (LSE: FSV) invests in undervalued companies across the market-cap spectrum, with an emphasis on UK small and mid caps. The trust has delivered 26%, 15% and 18% on a one-, three- and five-year basis (annualised share price returns as of 30 June).

The Invesco UK Opportunities Fund (UK) has more of a large-cap bias, and has delivered annualised returns of 13%, 12% and 16% over the same periods. Meanwhile, the Merchants Trust (LSE: MRCH) is a good option for value investors seeking income. It has a yield of 5% and has raised its dividend every year for the past 43 years.

The AVI Global Trust (LSE: AGT) also looks interesting. Many of the companies it contains are conglomerates and holding companies. This gives investors exposure to a diversified pool of firms, often at a discount. One example is the Italian holding company Exor – a significant owner of Ferrari. “Ferrari makes up over half the value of Exor, and Exor itself is trading at a discount of more than 50% compared with the value of its underlying companies,” says Bauernfreund.

A range of geographic exposures to value is available through exchange-traded funds run by Invesco. There is the FTSE RAFI All World 3000 UCITS ETF (LSE: PSRW) for a global value play; the FTSE RAFI US 1000 UCITS ETF (LSE: PRUS) for US value; and its European counterpart the FTSE RAFI Europe UCITS ETF (LSE: PSRE). The British version is the FTSE RAFI UK 100 UCITS ETF (LSE: PSRU). Meanwhile, the FTSE RAFI Emerging Markets UCITS ETF (LSE: PSRM) gives exposure to opportunities in developing economies.

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The next decade will look very different from the last. Deglobalisation, demographic shifts, and a revival of industrial policy are reshaping the global economy, and with it the foundations of equity market returns. We look for structural change that the market hasn’t yet priced in, and back companies where that change is both material and overlooked. It could be a shift in industry dynamics, a regulatory inflection point, a step change in demand, or a case of productivity being unlocked – but it must be meaningful and misunderstood. Valuation is crucial, and opportunity arises when the change we see is not priced in.

We focus on “forgotten equities”: capital-intensive, predominantly UK and European companies with strong cash flows, mispriced risk premia, and undervalued assets. That evolution reflects the changing face of global growth and where we think the next decade’s returns will come from.

Forgotten equities worth watching

Two basic truths of banking that are often forgotten are, firstly, that the industry tends to grow at least in line with nominal GDP. And secondly, economies of scale are especially powerful in banking, as incumbents earn higher returns and gain market share over time, either organically or via consolidation.

After 15 years of extreme stress for the industry, we believe this norm is reasserting itself. While many banks posted strong returns in recent quarters, those returns remain understated owing to interest-rate hedges. As these hedges unwind in the coming years and banks are exposed to higher rates, we expect continued positive momentum. In combination with balance-sheet growth outpacing cost inflation and share buybacks at low valuations, the sector’s potential earnings growth is compelling. This underpins our conviction in UK and Irish banks, such as NatWest Group (LSE: NWG), Lloyds Banking Group (LSE: LLOY) and AIB Group (Dublin: A5G), where we believe valuations still fail to reflect these tailwinds.

The building materials sector is another area where the market remains anchored to the past. For years, rising house prices masked stagnating volumes, with materials companies missing out. But now Europe is prioritising housebuilding, refurbishment and infrastructure investment, while deglobalisation, the energy transition and digitisation are driving demand for resilient onshore supply chains. Tight industry supply, years of underinvestment and growing political will to stimulate construction mean volume growth could return and lead to expanding margins. Many of these firms have already demonstrated pricing power in a weak-volume environment. If demand normalises, the upside could be substantial.

We believe Saint-Gobain (Paris: SGO), a leading European building-materials company, is priced for a return to the stagnant levels of construction seen before Covid. But with new drivers of demand, inflation falling, and interest rates set to follow, structural growth and a cyclical recovery are increasingly plausible. In addition, leading positions in areas such as glazing, insulation and energy-efficient materials allow for gains in market share.

Infineon Technologies (Frankfurt: IFX), a German semiconductor firm supplying the power chips crucial for electric vehicles (EVs), industrial automation and AI infrastructure, has weathered the downturn in the sector better than peers and looks well placed to benefit as demand rebounds. Its valuation remains modest compared with US rivals, yet its growth prospects are arguably stronger. As AI becomes embedded in everyday infrastructure, demand for Infineon’s components is set to rise sharply.

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Defence stocks seem to be displacing US big tech as investors’ number one hope for growth, according to new research.

Rolls-Royce (LON:RR.) topped the list of top stocks on Interactive Investor’s platform during June, and BAE Systems (LON:BA.) came in at number five. We could see even more defence stocks join these companies going forward as investors look to defence to deliver the kind of growth they’re used to seeing from big tech.

Microsoft entered the exclusive $4 trillion market cap club alongside Nvidia on 31 July. The Magnificent Seven stocks have been front and centre in investors’ minds for nearly three years.

But amid a rotation away from US stocks, and in light of unprecedented spending commitments from European nations, could defence stocks be the next source of growth for investors?

Trading platform IG surveys its clients twice a year to gauge UK retail investors’ sentiment towards the stock market.

The latest results show that UK investors think the defence and military sector will see the most growth over the next six months, knocking artificial intelligence (AI) off top spot.

“While AI sentiment remains bullish, the drivers behind the defence sector are stronger than ever, and investors are clearly responding to that momentum,” said Chris Beauchamp, chief market analyst at IG.

Of the 1,800 clients IG surveyed, 55% put defence stocks in their top three sectors for expected growth over the next six months – more than any other sector.

^{Source: IG}

Are defence stocks growing?

Industry giants like Rolls Royce and BAE Systems have captured much of investors’ attention this year, and the fundamentals are justifying the positivity.

BAE Systems announced its half-year results on 30 July and they underscored the growth its business is enjoying: revenue increased 11% year-on-year to £14.6 billion and underlying EBIT rose 13% to £1.55 billion.

“Although there were some concerns earlier in the year that the investor enthusiasm around BAE Systems was starting to falter, given its exposure to long term contracts, today’s update proves there is still reason to be optimistic towards the stock,” said Victoria Scholar, head of investment at Interactive Investor, at the time.

In its half-year results announced 31 July, Rolls Royce posted 11% year-on-year revenue growth (to £9.1 billion) and a 50% increase in underlying operating profit, to £1.7 billion, whilst boosting full year guidance from £2.7-2.9 billion to £3.1-3.2 billion.

Rolls Royce shares gained 8.5% the following session. As of close on 4 August, Rolls Royce shares have gained 91.7% so far this year.

The outlook for European defence stocks

Much of the boom in defence stocks has benefitted European companies in particular, stemming back from US president Donald Trump’s apparent laissez-faire approach to the NATO alliance.

“European defence companies have performed well under Trump’s presidency and amid the backdrop of global instability with the wars in Ukraine and the Middle East,” said Scholar.

As such there are concerns that the recently-announced EU-US trade deal could mark a resumption of closer ties between the US and Europe, especially with Trump simultaneously adopting a tougher stance towards Russia.

But Loredana Muharremi, equity analyst at Morningstar, believes the recent EU-US trade deal could benefit European defence stocks – even if it offers greater advantages to US firms in the sector.

“We don't see the EU tariff deal as a negative for European defence,” she said. “In fact, it aligns with our view that the US defence sector will continue to play an important role within Europe’s defence ecosystem.”

European nations would have had to keep buying from the US given capability gaps and the urgent need for off-the-shelf equipment, but Muharremi expects that the trade deal means that “over time the share of equipment from the US will decrease, in favour of European primes”.

How to invest in defence stocks

Investors can buy defence stocks via a stocks and shares ISA.

Investors who want to increase their exposure to defence stocks without focusing on just one or two stocks could consider buying a defence fund or investment trust.

One example is the Future of Defence UCITS ETF (LON:NATO). This exchange-traded fund (ETF) gives exposure to a portfolio of forward-looking companies that have exposure to the defence theme, and are screened for NATO alignment: all holdings are domiciled in NATO or NATO-allied countries.

Despite a turbulent global landscape in 2025, equity markets have remained resilient, a reminder of how well good businesses often respond to shocks and challenges. And it’s not just world events they’re having to cope with. Persistently high bond yields are raising the bar for equity investors.

When returns on cash in the bank and relatively safe bonds are high, it suppresses their appetite for stocks.

In an environment of uncertainty like this, you need to focus more than ever on quality companies, valuation discipline and portfolio diversification. The Goshawk Global Balanced Fund UCITS ETF (LSE: ROE) delivers on these fronts. Below are three holdings that illustrate the diverse opportunities in global equities.

Three global equities for your portfolio

Mitsubishi Electric (Tokyo: 6503) has long been a sprawling Japanese conglomerate, but recent years have seen rapid progress in corporate governance, aligning with government reforms. The company is implementing a return-on-invested-capital strategy to improve profitability. This has led to restructuring initiatives – such as spinning off the vehicle-electrification unit – to focus on higher-margin operations such as factory automation and air conditioning (vital for data centres).

In addition, its growing defence business, with advanced radar technology, adds another growth pillar. Not only is this company reasonably cheap on traditional metrics, but it also comes with huge balance-sheet value. The latter is key to traditional value investing and our analysis sees the stock trading well below the cost of rebuilding its various franchises.

One of the great opportunities that this market is throwing up is a set of companies that have demonstrated quality and compounding cash flows over many years. In the recent momentum and growth market, a number of these stocks have been left behind.

Thermo Fisher (NYSE: TMO) is one of these. It stands out as a leader in analytical instruments and services for clinical research, diagnostics, and environmental monitoring. Clients include pharmaceutical companies, research institutions and government agencies. From 2013 to 2023 it delivered annual free cash flow growth of approximately 15%.

Growth has moderated following the pandemic, while recent policy headwinds in research funding have reinforced the trend. This has been especially acute in the Trump presidency. Rather than rely on acquisitions, management has remained focused on improving the core business and growth rate. Last year, the company reaffirmed its expectation of long-term organic revenue growth guidance of 7%–9%. Combined with the target of robust cash generation, this supports the thesis that Thermo Fisher remains undervalued relative to its track record.

Seeking global stability and growth at reasonable prices has encouraged us to build a long-term position in Singapore Telecommunications (Singapore: Z74). The company excels at redeploying the strong cash flow it generates at home into higher-growth international markets, notably via Bharti Airtel in India, as well as holdings in Australia, the Philippines, Indonesia and Thailand. Indian mobile telephony is benefiting from easing competition, driving improved free cash flow.

In addition, 5G adoption and data centre investments underpin further expansion for the group. Singapore Telecommunications has also been adept at selling non-core assets to fund new growth and enhance shareholders’ returns. The current 4.7% dividend yield is well supported and highlights continued commitment to payouts.

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FRP Advisory Group (Aim: FRP) is a leading advisory company specialising in restructuring and insolvency services across the UK, with a market share of 12%. Over the past decade, it has expanded and doubled down on its position, increasing its share of the market threefold from 4% at the beginning of the 2010s. The firm has grown despite a relatively benign backdrop for insolvencies and restructurings. According to the Insolvency Service, the number of corporate insolvencies reached a high of 24,000 in 2009 (across England and Wales) before declining to 14,500 a year in 2015, 2016 and 2017, before rising slightly to 17,000 in 2019 and then falling again to a multi-decade low of 12,300 in 2020.

In the years between 2009 and 2019, struggling businesses were supported by low interest rates and modest economic growth, but all that changed in 2022. Government-backed schemes to support businesses helped stave off a complete collapse in activity during the pandemic. But as the schemes were withdrawn and interest rates rose, the number of firms falling into distress also climbed. From a low of 12,631, the number of insolvencies in England and Wales more than doubled to 25,164 in 2023.

FRP Advisory Group's expansion plans

FRP entered this environment in a position of strength. The company floated on the Aim junior market in March 2020, raising £20 million by placing new shares to boost its balance sheet and fund acquisitions. Since then, it has splurged on deals, with 14 completed from the time of the IPO to May 2025 and five deals completed in its 2025 financial year alone.

These deals have helped FRP expand beyond its traditional markets. For example, in May, it acquired One Advisory Group, which provides financial reporting and transaction advice, and governance services to more than 100 clients, the majority of which are listed on the London Stock Exchange. All these deals were funded with the company’s plentiful cash resources. Net cash was £33 million at the end of fiscal 2025, a little under 10% of the company’s market capitalisation.

According to Berenberg, which has analysed the company’s M&A-driven revenue expansion, these deals accounted for around half of revenue growth (20.5%) in 2022. Still, in fiscal 2023 and 2024, M&A growth was almost entirely non-existent compared with organic growth of 9.3% and 23.3% respectively. In fiscal 2025, deals accounted for about 40% of the company’s 18.7% top-line revenue growth.

Deals have been core to the company’s growth proposition, but so has the operating environment. Revenue has grown at a compound annual growth rate of 15% over the past decade, says Berenberg, as the number of corporate insolvencies rose significantly. The trend is continuing. The latest figures from the Insolvency Service suggest the number of registered company insolvencies in England and Wales rose 8% month-on-month in May 2025 and 15% year-on-year. Monthly insolvency numbers in the first five months of 2025 were higher than in 2024 and at a similar level to 2023, which saw a 30-year high in the annual number of insolvencies.

FRP Advisory Group's corporate finance arm

FRP has diversified from its core business of restructuring (although that still accounts for 70% to 80% of group revenue). Not all businesses that run into difficulties end up collapsing. Some are acquired, and some manage to agree a deal with creditors. Even here, FRP’s corporate finance business (15% to 20% of revenue) has a strong foothold in the market. It was the 19th-most-active M&A adviser in the year, being involved in 76 successful deals, averaging £20 million in deal value. This suggests FRP is firmly established in that mid-market bracket of firms that form the backbone of the UK economy.

Berenberg has pencilled in pre-deal revenue growth of 7.7% in 2026, 4% in 2027 and 4% in 2028. Earnings are expected to grow at a much faster clip. Thanks to its successful integrations, the company has sector-leading margins, with a 27% earnings before interest, tax, depreciation and amortisation (Ebitda) margin, exceeding its peer group average of 24%. As such, analysts have pencilled in Ebitda growth of 8.9% in 2026 on a margin of 27.5%. Return on capital employed (Roce), a measure of profit for every pound invested, is expected to be 34.9% on a forward basis.

Undervalued growth

These are all very impressive figures, but despite FRP’s growth, profitability and strong balance sheet, the market doesn’t seem to be interested. The stock is trading at a forward price/earnings (p/e) ratio of just 10.2, falling to 9.8 based on 2027 estimates. It also offers a forward dividend yield of 4.6%. Strip out cash, which is expected to hit £39 million at the end of 2026 (assuming the firm does not find any further deals), and the p/e falls to around nine times on a forward basis.

Based on these numbers and compared to the peer group average, Berenberg believes the stock is deeply undervalued. They’ve pencilled in a price target of 220p per share, suggesting a potential upside of around 72% from current levels, excluding the dividend yield on offer. Some caution is warranted, as restructuring is an inherently cyclical business. If interest rates fall and the government decides to take more action to stimulate business in the UK, the number of restructuring and insolvency deals will almost certainly fall. Still, FRP’s management team has demonstrated over the past five years that the company has what it takes to manage the cycle and even grow during tough periods.

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London’s Aim small-cap market is down 40% since mid 2021, but within that there has been a wide disparity of outcomes. Many 2021-vintage initial public offerings (IPOs) are down 80% or more. Yet one Aim-listed stock looks to have achieved escape velocity, having rocketed 28-fold since May 2021.

Interestingly, Filtronic (Aim: FTC) is not a start-up or even a recent IPO. The company’s history goes back to the 1970s, when it specialised in components for the defence industry before quickly adapting to benefit from the 1980s boom in mobile phones. The shares have been listed since the mid 1990s, but were demoted from the main market to Aim in 2015, following a difficult decade when the telecoms, media and technology bubble burst. Between 2000 and 2015 the shares fell from £7 to just 5p, a decline of more than 99%.

New opportunities for Filtronic

Filtronic’s products are a mix of transceivers, amplifiers and duplexers – components used to send and receive communication signals. It has three design sites in the north of England (Manchester, Leeds and Sedgefield), and an assembly and testing centre in the US. Last year, the firm was awarded the King’s Award for Enterprise in Innovation for its monolithic microwave integrated circuit, which is deployed across the world in 5G networks. The group’s equipment is also used in high-altitude platform systems (HAPS) for controlling drones and airships, though this is not a material driver of revenue.

However, rather than terrestrial telecoms, space is a huge opportunity for shareholders today, according to Richard Staveley of the Rockwood Strategic investment trust, who bought into the company in May 2023 at around 12p per share.

Filtronic has been winning contracts to supply components for ground stations and is hoping to win new satellite customers as well as developing products for the satellites themselves. The company had net cash of roughly £12 million at the end of May, and he believes, a potentially very bright future as existing clients grow and the business achieves scale.

Filtronic contract wins

A series of key contract wins in recent years have sent sales soaring. In early 2023, management began to announce contracts with an unnamed leading global provider of low-earth orbit (LEO) satellites. LEO satellites (at an altitude of 1,200km) have significantly lower latency of 25ms-50ms for signals – 10 to 20 times faster than traditional geostationary satellites that sit at 36,000km.

They can use less-congested frequency bands that are otherwise unavailable to more distant geostationary satellites. Launches to LEO also require less fuel and smaller rockets compared with higher orbits, meaning they are more affordable and can be used more often. Unlike geostationary satellites, LEO satellites operate as constellations – large networks of hundreds of individual satellites orbiting the Earth in less than two hours, many times a day.

In September 2023, Filtronic also won a £3 million order with the European Space Agency. In April 2024, it won a £16 million contract and five year-partnership with Starlink. Revenues more than doubled to £56 million in the financial year ending May 2025, compared with the previous year.

In June, it announced its largest contract to date, with an order from SpaceX worth $32.5 million, which will be fulfilled in the year ending May 2026. Momentum has continued, with a £13 million order in the aerospace and defence sector announced in mid-July.

Filtronic shares attract attention

Under the strategic agreement with SpaceX, Filtronic issued warrants to allow SpaceX to buy up to 10% of its share capital once $60 million of orders had been placed by SpaceX. It’s unclear whether SpaceX will hold the shares or sell for an immediate profit, but the US company has not disclosed a stake, which suggests it has opted for the latter.

However, one US asset manager – Driehaus Capital – has announced a disclosable stake just above 3%. Even as UK active fund managers continued to suffer outflows, Aim success stories are attracting attention from overseas investors.

Filtronic’s shares are now trading on seven times May 2025 sales. This is not cheap, but it is far from the stratospheric valuations seen in unlisted space shares. SpaceX is conducting a funding round that reportedly values it at roughly $400 billion, which suggests a valuation of just under 30 times sales.

Filtronic is on a price/ earnings ratio of 55 times forecasts for the year ending May 2026, and a forecast enterprise value/Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio of 21. Investors clearly expect significantly more growth to come. That may be right – management suggested at the first-half results that seven tonnes of satellites are expected to be launched every day over the next 10 years.

Still, there are risks. The top three customers accounted for 84% of revenue last year. Orders are likely to be lumpy. Cavendish – Filtronic’s house broker – is yet to publish forecasts for the year ending May 2027. Given the share-price performance, it’s possible that investors’ expectations have run ahead of themselves. So far though, Nat Edington, the chief executive who was appointed in May last year, has been able to execute. In any case, it’s refreshing to celebrate an Aim company on a rising trajectory, in a sector that looks like it will enjoy a stellar future.

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Income has historically been one of the best-performing investment strategies. The average annualised return of dividend-paying stocks in the S&P 500 between 1973 and 2024 was 9.2%, compared with 4.3% for non-dividend-paying stocks, according to a study by Ned Davis Research. What’s more, dividend payers were less volatile and offered more protection during market downturns. In 2022, when the S&P 500 declined by more than 18%, dividend-paying stocks in the index fell by 11.1%, while non-dividend payers experienced a 38.7% loss. In the global financial crisis of 2007-2009, S&P 500 earnings per share plummeted by 92% while dividends fell by only 6%.

A wealth of other studies come to a similar conclusion. One explanation for this is superior financial health. Companies with the best dividend records tend to have robust balance sheets, strong profit margins and substantial economies of scale, as well as competitive advantages. Cash that isn’t distributed is reinvested, used to reduce debt or spent on buying back stock.

Avoid the income trap

However, investors need to be careful what lessons they take from this. Companies outperform not because they pay a dividend, but because they are financially responsible enough to maintain that dividend. Do not confuse yield with value or quality. A company that offers a high dividend yield is not necessarily cheap or a good business. In fact, the very highest-yielding stocks often underperform the market over time – their dividends are high because they are unsustainable. Some research suggests splitting the market into five groups by yield and focusing on the second-highest yielding group instead.

Income investors and fund managers chasing yield often fall into these kinds of traps. Active fund managers with an income mandate are particularly vulnerable, since they must keep pace with the rest of the industry.

The FTSE 100 currently yields roughly 4%, and many UK equity income managers will use this as a benchmark for their portfolio. That means they could be forced to deploy capital in stocks that are not necessarily of the best quality but offer the highest yields, in order to maintain the yield from their fund.

Balance income and growth

Instead of relying solely on the dividend yield, investors should consider funds that take into account the total shareholder return, also known as the total shareholder yield. Companies that return cash to shareholders through other methods – such as stock buybacks or debt repayment – have more flexibility than firms trying to chase fixed dividend targets.

Management can switch off buybacks at any point, and often pause paying down many types of debt if they wish. Reneging on dividend expectations is significantly more risky. There’s a lengthy list of CEOs who have had to step down after U-turning on a dividend commitment.

Investors should also look at growth. Dividends are powerful, but a company’s earnings growth ultimately dictates how much cash it can return to investors. A fund that focuses on growth rather than income could generate better long-term returns.

You can still draw a regular income from a fund that achieves strong capital gains by selling, say, 4% of your holding every year. Since the top rate of capital gains tax is currently 28%, compared with 39.4% for dividends, there may be a tax benefit to this approach as well, if your fund is held outside a tax wrapper such as an individual savings account (ISA).

JPMorgan Global Growth and Income (LSE: JGGI) is one such fund we like. Passive investors might look at an exchange-traded fund (ETF) such as Fidelity Global Quality Income ETF (LSE: FGQD).

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AIM, which stands for Alternative Investment Market, celebrates its 30th anniversary on 19 June this year, after launching in 1995.

Back then, there were just 10 companies listed on AIM, with a combined valuation of £82 million.

Today, the figure is 679 – although at its peak, 1,694 companies were listed on AIM in 2007.

A sub-market of the London Stock Exchange (LSE), AIM is home to small and medium-sized companies looking to raise money, who might not meet the listing requirements of the main market.

According to the LSE, “AIM is the most active growth market in Europe, and over the last five years, 45% of all capital raised on European growth markets has been on AIM”.

However, while some investors have done very well by buying certain AIM stocks – or perhaps within an investment fund – the market is considered to be high risk and volatile, and there have been some disasters along the way over the past three decades.

Notable examples include Quindell, Purplebricks, and Affinity Internet, which faced issues like accounting irregularities, missing funds and eventual collapse.

Dan Coatsworth, investment analyst at AJ Bell, comments: “AIM has been called the ‘Wild West’ in the past and has had its fair share of disasters, yet it would be wrong to call the entire market a failure. It was designed to nurture growing companies, and the achievements of Hiscox and Genus prove it has been successful.”

The insurer Hiscox is now a FTSE 100 company, while genetics group Genus has ascended to the ranks of the FTSE 250.

“Anyone who bought Hiscox at its AIM IPO would have subsequently enjoyed a 2,650% total return, which factors in share price gains and dividends,” says Coatsworth.

He adds that investment trust Athelney Trust also made the move from being an AIM early bird to joining the main market.

AIM comes with some tax advantages, for example you can invest via an AIM ISA, while some AIM shares benefit from business property relief, meaning no inheritance tax is due provided the investment is held for at least two years. However, the tax relief will be cut from April 2026, meaning investors will be liable for 20% inheritance tax.

“While AIM’s 30th anniversary has been clouded by talk of how the market is shrinking fast, there are still reasons to celebrate its achievements. A good chunk of AIM’s original members have gone on to score a winning goal for investors’ portfolios,” says Coatsworth.

According to AJ Bell, 11 companies that joined AIM in its first six months of existence are still on the UK stock market today. Three of these companies are now on the main market, leaving eight on AIM.

Investors could have made significant returns with one of the “early bird” AIM stocks, while four of the companies have posted a negative total return over the past 30 years.

How have the original AIM stocks performed since 1995?

AJ Bell crunched the numbers to show how the eight AIM stocks that were listed in 1995 and still on the market today have performed over the past 30 years.

Source: AJ Bell, LSEG. Total return since respective IPO date in 1995 until 12 June 2025.

The best performer among those still quoted on AIM is Wynnstay Properties, which has delivered an astonishing 6,331% total return.

“Its history lies in developing and managing residential property in London’s Kensington area, but it switched to commercial property in 1972. While the business is still relatively small compared to many real estate stocks on the London Stock Exchange, the rich returns for investors speak for themselves,” comments Coatsworth.

The second-best performer is NWF. “Supplying animal feed to farmers and filling up domestic heating tanks with oil might not sound very glamorous, but it’s been a ticket to steady wealth creation for NWF. A 920% total return since joining AIM in September 1995 is not to be sniffed at,” says Coatsworth.

“AIM has been a good place for small companies to broaden their shareholder base and tap capital markets to accelerate their growth. NWF has made various bolt-on acquisitions over the past three decades, some of which have been part-funded by issuing new shares.”

At the bottom of the table, four companies have all made a loss over 30 years. Exploration company Bezant Resources has performed the worst, losing 99%.

The investment platform Interactive Investor also recently analysed the performance of AIM.

It found that there are 230 AIM companies that have been listed on the market for the past 20 years. Accesso Technology Group has delivered the best performance over the past two decades (a 13,900% return), with Judges Scientific coming in second with a 7,490% return.

The pair are also the top two performers for the whole of the London Stock Exchange over that period.

It could be time to snap up some shares in McDonald's as the fast-food chain continues to expand around the world. 

In fact, the largest restaurant chain in France, the home of gastronomy and haute cuisine, is McDonald’s. Perhaps this shouldn’t really be a surprise: young French people like eating burgers as much as anybody else. 

And it’s not just the French that see the good side of McDonald’s. Last year my daughter started bringing our new grandson over to see us quite regularly, and for these visits we had lunch at home and then a take-away snack. 

I was so impressed by our local branch that I bought some shares in the parent company last year at $240, partly on the basis that the cost of living crisis and rising inflation may help McDonald’s at the expense of other restaurants. 

The group is the largest restaurant operator in the world – a truly global business with a 55-year international operating history. It has nearly 40,000 outlets in over 100 countries, of which 95% are franchised. 

The franchised outlets deliver a steady stream of both fee income and rents – the properties are either owned by McDonald’s or on long leases – and this steady income brings stability to revenue and profits. 

McDonald’s total annual revenue is more than $23bn, roughly 60% of which comes from franchisee royalty fees and rental payments.

McDonald's has a wide moat

The restaurant business generally has low barriers to entry. McDonald’s is an exception, with a wide moat formed by its strong brand and large scale. 

This gives it hefty purchasing power – enabling volume discounts and lower commissions to companies such as Uber Eats – and allows substantial marketing and technology investment, which still forms only a small proportion of revenue. 

The franchising model is highly profitable, with operating margins (operating profit to sales) at 44.6% last year, compared with Coca-Cola’s at 28% or Apple’s at 30.2%. 

Management’s “accelerating the arches” growth strategy focuses on the “four Ds” – delivery, digital, drive-through and development. 

Examples of this strategy are the company’s mobile app, loyalty programme, and emphasis on order automation and suggestive selling. 

Some 40% of sales in its six core markets now come through digital channels. These and other initiatives are leading to market share gains, store sales growth and a strong store development pipeline.

Rewarding franchisees

In the US, McDonald’s averaged sales per franchised restaurant of $3.6m in 2022, compared with $1.4m for Burger King and $1.9m for Wendy’s. Given that stores have substantial fixed costs, higher revenue per store flows through to higher profitability compared with rivals. 

McDonald’s return on invested capital (ROIC) has been 18% over the last five years, which include the pandemic year of 2020, when ROIC fell to 14%. Crucially, this model delivers decent returns to franchisees, who earn mid teens cash returns on their cash outlays, reckons Morningstar. 

The group’s strong brand is important for attracting new franchisees, since it helps new units reach average unit sales more quickly. McDonald’s scale also enables it to provide franchisees with one-off help such as the $100m-$150m used in 2023 to help European franchisees cope with high food cost inflation. 

Rent holidays in 2020 are another example of help to franchisees, who are encouraged to invest in long-term customer relationships to grow market share for them and for McDonald’s.

Steady growth in capital and income

McDonald’s is one of those world-class companies in a stable sector that gives steady capital growth with a growing dividend. 

Over the past five years, the shares are up by 77%, while the dividend has almost doubled in the past ten years. The company reported revenue of $23.2bn in 2022 and operating profit (ie, before interest and tax) of $10.34bn. 

McDonald’s has increased its dividend every year since 1997 and the current quarterly dividend of $1.52 puts it on a forward dividend yield of 2.17%, based on a share price of $280 at the time of writing. 

The trailing price/earnings (p/e) ratio is 25.8, while the p/e ratio based on forecast earnings for 2033 is 24.3, according to estimates compiled by Bloomberg.

Learning more about the financial world and how to improve your financial situation can generate a considerable return on investment over the long run. 

Plenty of free information exists to help anyone improve their knowledge of the financial world and investing landscape. The IG Academy, from the multinational financial services business IG Group, has the resources investors require to build their understanding of financial products and, ultimately, improve their returns when investing. 

 Designed for beginners  

 The IG Academy is aimed at beginner investors and beginner traders. A series of short, 25-minute lessons are designed to give beginners a solid understanding of financial markets, covering topics such as how to get started and build a diversified portfolio using different products and strategies. 

IG operates one of the world's most comprehensive and advanced trading platforms. 

Investors and traders can use the company's offering to trade thousands of markets worldwide. The company offers a simple trading platform with attractive fees for investors who want to buy and sell stocks and shares (there's no commission for active investors who’ve traded 3+ times in the previous month). 

And for those investors and traders who want more flexibility, the platform offers advanced trading tools. These tools allow traders to bet on the direction of non-traditional markets such as commodities. 

 Swing the odds in your favour  

 These powerful tools can yield powerful results, but they can be daunting if you don't know what you're doing.

That's where the IG Academy comes into play. The educational resource has been designed to enable investors to achieve the best returns while controlling risk across various markets and asset strategies. The Academy is designed to help investors become the best they can be and utilise all available financial products. 

It would be a mistake to say that investing is ever easy. Even professionals make severe, life-changing mistakes on a regular basis, and it requires a lot of skill to avoid all of the pitfalls of financial markets. 

But the best investors avoid making severe errors by continually working to learn and improve their knowledge of the financial world, opportunities on offer and risks to avoid. In fact, it's knowledge, above all else, that makes a great investor. 

One of the biggest puzzles in investing is that it can be relatively easy to make a lot of money, but it takes a lot of work to keep this money. The list of successful investors and business people who've made fortunes in their respective fields but have then gone on to lose it all is endless. 

 The key is to protect the wealth you've built  

 The ability to grow wealth through all market conditions and avoid significant losses is the mark of a truly great investor. 

Education and learning are the only way to keep ahead of the market. The great American investor, Warren Buffett, has said he spends most of his day reading and learning. Even though he's been investing since he was a teenager and is 92 today, he has never taken his knowledge for granted. 

Buffett knows he needs to keep learning to stay ahead of the curve, even though he has more experience than 99% of the world's investors - he also knows research reduces risk. 

The more you know about a subject, the less likely you are to make a significant mistake. 

Even if you think you know everything, as Buffett shows, there's always something more to learn. 

Building skills and confidence 

 The IG Academy won't turn you into the next Warren Buffett, but it will equip you with the skills to navigate financial markets and develop as an investor. 

The resources will help inspire confidence, reduce the risk and, hopefully, improve returns over the long run. 

There's no guarantee anyone will become a billionaire genius after reading and studying financial resources. Still, it will help you make the most of your own knowledge, resources and improve your confidence.

After all, you can only be a great investor if you are comfortable making the big calls. The only way to be confident you are making the right calls is to keep working, learning, analysing and planning. 

The best investors know they need to do the work and use all the tools available to get the best results. IG's platform offers all the resources required to drive the best outcomes for your trading strategy.  

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The Fundsmith Equity fund consistently ranks as one of the most popular equity funds among investors in the UK, and it’s easy to understand why.

Managed by star fund manager Terry Smith, since inception on the 1st of November 2010, the fund has produced an annualised return of 15.6% compared to 11.3% for the MSCI world index (in sterling).

However, 2022 was by far the worst calendar year of performance for the fund since its launch, both in absolute terms and relative to the global stock market.

It lost 13.8% last year compared to a loss of -7.8% of its benchmark. This year, the fund has performed marginally better, although it has still underperformed. In the six months to the end of June, Fundsmith returned 8.5% compared with 8.9% for the index.

Fundsmith's performance in 2023

Writing in his half-year letter to investors, Smith explained Fundsmith’s holdings in Waters Corp, Mettler-Toledo International, and cosmetics group Estee Lauder weighed on returns in the first half. 

“Waters and Mettler-Toledo have both been affected by the slowdown in laboratory expenditures post the pandemic. In neither case are we bothered by this. In fact, we hope it presents an opportunity for us to buy more,” the fund manager explained in the update. 

But he seemed more concerned about the performance of Estee Lauder. 

He said: “While domestic travel has returned, it seems that Chinese consumers are buying watches, handbags, and other luxury goods first which it was harder to shop for online during the lockdown. It has revealed some severe weakness in Estée Lauder’s supply chain with no manufacturing capability in Asia.”

This “debacle” could lead to Estee Lauder’s ejection from the portfolio, unless the company can turn the situation around. Smith doesn’t often sell holdings, but he’s been quick to eject companies from Fundsmith’s portfolio if they start to lose direction. 

For example, Smith recently dumped the fund’s position in Amazon, locking in a loss after first buying the stock in July 2021. In his half-year update, the fund manager explained that he’d made the decision to sell after the group’s new CEO, Andy Jassy seemingly decided to push the business in a different strategic direction. 

Smith said: “It is always easier to talk the talk than it is to walk the walk and the CEO’s pronouncement that he wanted Amazon to seek routes to get bigger in grocery retail ran counter to all these principles.”

“Where companies choose to invest outside a powerful core franchise in which they already have expertise we believe they are likely to destroy value, and especially so where they are entering a sector which already has poor returns,” he added. 

Buy and hold quality

Fundsmith has always been focused on buying and holding quality companies, a strategy explained by Fundsmith’s three-step investment strategy (1. Buy good companies; 2. Don’t overpay; and 3. Do nothing) is the best way to approach the market.

Fundsmith has even gone so far as to write an ‘Owner's manual’ to explain to its investors what it’s trying to achieve and how it will achieve it.

This whole process is designed to help investors focus on the fundamentals of the companies in the underlying portfolio, and ignore short-term market conditions.

One of the ways Smith does this is with a table in the Fundsmith annual report showing “what Fundsmith would be like if instead of being a fund it was a company and accounted for the stakes which it owns in the portfolio on a ‘look-through’ basis.”

On this basis, at the end of 2022, Fundsmith as a company had a return on capital employed - a measure of profit for every £1 invested in the business - of 32%, double the average of the FTSE 100 and nearly double the average of the S&P 500. It also had a gross profit margin of 64% compared to a mid-40s range for the indices.

These healthy margins have helped the companies in the portfolio absorb higher manufacturing and input costs that have hurt so many businesses over the past two years. 

As Smith explained in his note, “Procter & Gamble Co used to ‘make things’ for $0.50 and ‘sell them’ for $1.00, but now it costs $0.53 to make them. McCormick & Co Inc used to make things for $0.58 and sell them for $1.00, but now it makes them for $0.63. Estée Lauder used to make things for $0.20 and sell them for $1.00, now it costs $0.28 to make them.”

“This still leaves our companies’ gross margins way above those of the market average, which means their bottom lines are better protected, but they cannot completely offset these headwinds.”

But despite rising costs and squeezed margins, Smith isn’t changing strategy. 

The fund’s best-performing holdings in the first six months were Meta (up 140%), Microsoft (up 40%) and L’Oreal (up 30%). 

The author holds the Fundsmith Equity fund.

Most investors have heard the term “value trap”. Indeed, if you’re a value-inclined investor, you’ve probably heard it rather more often than you’d like over the last few years. A value trap is a stock that looks cheap (usually based on a “fundamental” measure such as the price/book ratio) and ripe for a turnaround at any minute, but which simply keeps underperforming. Value traps can do a lot of harm to a portfolio and they are plentiful, says Ben Inker of US asset manager GMO. Inker defines a “trap” as a stock which has missed its revenue expectations in the past 12 months and has also warned on its future sales outlook. In a typical year, nearly a third of the stocks in the MSCI USA value index turn out to be value traps. On average they underperform the index by 9%. So it’s easy to see why the term is so well known. Investors are far less familiar with the idea of a “growth trap”.

A growth trap is just a growth stock (a stock which looks expensive but appears to be growing rapidly enough to justify the premium valuation) which misses its forecasts in the same way. These are, says Inker, even more common and even more damaging than value traps. In any given year, about 37% of the MSCI USA Growth index fall into the category, with an average underperformance of 13%. A good recent example is Snap, which owns social media app Snapchat. Snap saw its share price drop by about 45% in a day last week, after it warned that advertising revenue would be at the lower end of expectations and that the outlook for the wider economy was deteriorating rapidly. The stock is now down about 85% on its 2021 peak.

You can see why “growth traps” are more painful than “value traps”. When a value stock disappoints, it’s just underperforming already low expectations. But when a former growth star disappoints, the gap between the dream and the reality is far greater – so prices have to fall sharply to adjust. Snap is far from the only “growth trap” to have sprung shut in the past year or so. Rising interest rates and the end of the pandemic have made for a particularly tough backdrop for high-flying companies. Streaming service Netflix, crypto exchange Coinbase and fancy exercise bike company Peloton are just some of the casualties.

Yet for those thinking of going bargain hunting, Inker notes that – while they’ve started to lose some of their premium rating – growth stocks remain very expensive relative to value stocks compared to history. That in turn implies, he says, that we can expect to see more “growth trap” collapses “in the next year than there were in the last one”. In other words, remain wary of expensive stocks that are still pricing in lots of growth – and hang on to your value stocks.

For more on the topic, see:

Value is starting to emerge in the markets

Has growth investing had its day? Don’t be so sure

2021 was a frustrating year for the bears of growth investing, whose dire predictions have been wrong for at least five years.

The MSCI World Value index did outperform the Growth index but the margin, 23.9% against 22.5%, was hardly a dramatic vindication.

A sharp fall this year (which gathered some speed yesterday) in growth shares in general and the technology sector in particular has had the bears jumping up and down with excitement.

Jeremy Grantham, who has been bearish for nearly ten years, is forecasting a fall of nearly 50% in the US stockmarket.

Is the end of the world nigh for growth investing?

Tech stocks aren’t all as expensive as they might look

The stockmarket sell-off has been widely attributed to rising bond yields, which decrease the value of near-term relative to long-term earnings.

But, as Anatole Kaletsky of Gavekal argues, the fall in the valuation of growth stocks has been disproportionate to the rise in the yield of ten-year US Treasury bonds, which recently reached 1.9%.

Moreover, this increase was universally expected so should have been discounted in valuations; only if the expected peak rises above 2.5%-3% should valuations be undermined and a lower peak is as likely as a higher one.

A better explanation is that the technology-led growth sector is diverging. The stocks with rising earnings, notably the “Magnificent 8” as Ed Yardeni calls them (Apple, Amazon, Alphabet/Google, Microsoft, Nvidia, Netflix, Tesla and Facebook/Meta) did well last year.

The market value of the Mag-8, which account for half the S&P Growth index and a quarter of the S&P 500, rose by 37.5% against a rise of 23.7% for the rest of the S&P 500.

The “jam tomorrow” stocks still making losses, especially those which announced disappointing progress, have crashed. Exercise-bike maker Peloton fell 76% (and another 24% since); digital documents group Docusign trades 61% below its August peak; online car showroom Cazoo is 70% below its February peak; and e-commerce group THG is down 80% over the last year. These businesses usually need to raise new equity just to survive.

The obvious answer is to focus on growth stocks with visible earnings growth, but these do not come cheaply; the Mag-8 trades on 30 times forward earnings, having reached 38 times in early 2020.

Expected revenue growth is 15% and earnings growth 10%, numbers that will have to be exceeded for the shares to rise higher. This does not look demanding as expected earnings growth is the lowest since 2013.

The US technology sector, which includes only three of the Mag-8, may be expensive but Yardeni shows that it is significantly less so than at the height of the dotcom boom. In March 2000, the tech sector accounted for over a third of the S&P 500’s valuation, but its share of earnings peaked at 18% in September 2000. At the start of 2022, the sector accounted for 28.6% of the S&P 500’s valuation, but 22.4% of its earnings.

It’s easy to forget that the Mag-8 were also unprofitable when they listed. Amazon’s share price fell by more than 90% in the tech crash of 2000-2001, since when it has multiplied 500 fold.

Miles Hamilton of Ninety One Asset Management points out that Netflix listed at $1 (after adjusting for subsequent stock splits) in 2001 and now trades at $400, having peaked at $690 last October. Its share price has halved from its previous peak six times, the drawdown once reaching 75%.

So some of those loss-making disasters are likely to become highly profitable behemoths. But which? Perhaps Moderna, down 64% from its September 2021 high or Zoom, down 73% since October 2020?

Don’t be too cynical – there are still plenty of exciting new sectors with huge potential

Fortunately, investors don’t need to decide as they can leave that task to the expert fund managers at Baillie Gifford, Polar Capital, Allianz and Blue Whale to do it for them. These managers will also keep a careful eye on the new technologies and the companies pioneering them to separate the potential winners from the hopelessly optimistic and outright frauds (such as Theranos).

The potential is huge and includes aeroplanes powered by electricity, nuclear fusion, the wireless transmission of electricity and a vaccine for malaria. Progress in some areas has been elusive for decades, while in others it has been remarkably quick.

In 20 years’ time, some technologies that are now pipedreams will be taken for granted while others will still be pipedreams.

In addition, many existing technologies are far from mature. Electric cars account for less than 8% of total global sales and the limits on battery lives are a bottleneck in the adoption of renewable energy and many other technologies. Small-scale nuclear power stations have yet to be rolled out, while the efficiency of solar panels is low and the installation cost high. Incremental advances in pharmaceutical and instrument technology for the treatment of cancer, heart disease and senile dementia have much further to go.

There is no shortage of opportunities for advances in new technology so fortunes will continue to be made and lost. The question is not whether it will be right to invest in growth companies, but when.

The current correction in valuations could go further, but it is as well to remember Nathan Rothschild’s explanation for his investment success; “I never buy at the low and I always sell too soon.”

If the yield on ten-year US Treasuries rises not just to 2.5% or 3% but to 5% or higher, all bets will be off and growth shares, along with the rest of the market, will fall significantly further. This is what the bears are hoping for, but its likelihood is steadily declining; the bad news about inflation is common knowledge and should be discounted in the market.

Even, then, don’t expect the bears to ever change their minds. In late 2008, the S&P 500 index bottomed at 666, but Albert Edwards, the highly-regarded strategist at Societe Generale who had predicted the crash, was targeting a low of 400. He kept to that target for years while the market recovered. The index, around 10% down from its peak, now stands at around 4,350.