The companies fuelling global growth trends

Matt Reynolds

Capital Group

Themes around secular growth are widely covered by the media, but they often focus on the consumer-facing companies that dominate a particular area. Getting less recognition are the companies that function as ‘enablers’. These companies are supplying the fundamental elements that allow the burgeoning growth themes to take hold. In our view, these businesses present particularly exciting prospects as their fortunes are not tied to hard-to-predict market outcomes, such as the success of any one consumer product or drug compound, but at the same time they could ride the tailwinds of secular growth stories.


In a short period of time consumer electronic devices have pervaded almost every area of life. This is certainly the case in the developed world, and lower cost has increased accessibility and penetration in emerging markets. The growth associated with this trend has been explosive. Branded consumer electronic products have created deep and loyal customer bases around the world. However, these consumer-facing companies can be subject to changing trends and swings in customer sentiment. Loyalty, while difficult to build, can be lost, and along with it market share.

However, a notable characteristic of the underlying components for electronic devices is that they are often generic. This means they are compatible across devices, regardless of brand. Because suppliers of these components sell to multiple consumer-facing companies, they may be less sensitive to the success or failure of the latest product release. Prime examples are TSMC and Broadcom, which produce chips and components that are used in smart phones, tablets and smart watches across a range of brands. 


Ageing populations and growing wealth is increasing demand for healthcare globally. A backdrop of advances in technology and reduced costs has contributed to phenomenal growth in medical science research and development (R&D). While the companies conducting the underlying research could be significantly rewarded or punished by the success or failure of a particular compound or process, the companies supplying the tool and devices to conduct analysis may be less impacted. Their tools can be used across companies and research facilities. Thermo Fisher Scientific makes a wide range of analytical instruments and diagnostic tools that are used in the drug discovery process. However, it is not dependent on a successful clinical result. We believe it has the potential to benefit from the exciting growth prospects of drug innovation and development, but at the same time it is more insulated from the highs and lows of the ultimate outcome.

Software: a long growth runway ahead 

A US$500 billion industry growing at 9% annually (1) 

Software spending is growing faster than both the broader IT industry – which includes hardware, services and software – at 5% p.a.(1), and global GDP growth, at 3.3% (2). While still making up a smaller share of total IT spend, it has been steadily taking market share for the past five decades and is a trend we expect to persist.

Platform shifts are decades long and cause major disruption

The shift to the cloud is one area of software taking IT spend away from hardware. The cloud is a huge network of servers that provides users with remote access to storage and computing power through the internet. Rather than making major investments in their own IT infrastructure, companies can gain access to data and software applications for a fraction of the cost through the cloud. This means cloud vendors capture more of the overall IT spend. According to research by Gartner (1), by 2022, total spending in the public cloud computing market could reach US$331 billion, up from US$145 billion in 2017. 

Cloud adoption has coincided with the rise of subscription-based business models

Traditional software business models charged a significant upfront licence fee and an annual maintenance fee for support and access to future updates, resulting in significant cyclicality in revenue. Cloud platforms have enabled companies to adopt subscription-based models. This lowers the cost of adoption, and with it expands the addressable market, which could increase recurring revenue. Businesses are attracted to this model because their IT spend becomes more predictable, managing licences becomes easier, and users get access to the latest version. 

One company tapping into this opportunity is ServiceNow. The company provides subscription-based software services that manage human resources, help desk and other IT support. It describes itself as a “digital workflow company”, and claims that its customer base includes 42% of the 2,000 largest global companies (3). We believe ServiceNow’s subscription-based cloud offering has helped support its high customer retention rate – which stands at over 95% (4) – and helped expand its addressable market. 

Spotlight on financial exchanges 

As central banks around the world move towards looser monetary policy, the financials sector has seen investors reduce exposure. But the sector is home to a diverse range of companies with different business models and revenue drivers. Banks are particularly sensitive to interest rate levels, and can often be more negatively impacted by central banks cutting rates. The New Perspective strategy has a relatively light exposure to banks.

Nevertheless, we do see some areas of interest within the sector, particularly among financial exchanges. Examining the different revenue drivers of these businesses can help identify companies that could be less affected by market volatility, or in fact profit from it. Financial exchanges are often cited as lower-beta stocks, benefitting from periods of market volatility because transactional volumes increase, which support revenues.

However, even within this group, the underlying businesses are positioned quite differently. London Stock Exchange Group (LSE) and CME Group are two examples. While LSE has a significant clearing house and equities exchange business, it has been steadily diversifying its business model by increasing its focus on its data and services business, which has the potential for more regular revenue streams. LSE began this journey with its acquisition of index providers FTSE in 2011, Russell in 2014, and Citi’s Yield Book indices for fixed income in 2017, which included the well- known World Government Bond Index (WGBI) (5). Its latest slated acquisition is Refinitiv, the former Thomson Reuters terminal and data business – the main rival to Bloomberg Terminals. This acquisition has the potential to expand LSE’s information services business further. Shifting more of its revenue away from its transactional and listings business could help LSE deliver more consistent results over the business cycle. 

Counter-cyclical stocks play an important role in portfolio construction

In contrast to LSE, derivatives exchange operator CME Group’s revenues have been much more sensitive to trading volumes. This means greater market volatility has had a more meaningful impact on CME’s revenues. During market corrections or periods of elevated volatility, transactions volumes typically increase as investors attempt to hedge the impact, or rotate into more defensive sectors. As higher market volatility has had a positive impact on CME’s revenues, its stock price has displayed counter- cyclical characteristics. This is demonstrated by CME’s share price returns during more volatile conditions. CME has delivered positive excess returns in 13 of the last 14 down markets of more than 5%, compared with the index (see below)(6).

Combining stocks that react differently in varied market conditions is a key element in creating a diversified portfolio that can navigate a range of economic conditions. 

CME has outpaced the index in the majority of market declines of more than 5% (6) 

Tap into secular growth trends

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  1. Gartner, IDC, July 2019
  2. IMF, April 2019 (GDP: gross domestic product) 
  3. Fortune’s 2018 Future 50 report 
  4. ServiceNow, 30 June 2019 
  5. Source: London Stock Exchange Group
  6. Relative CME Group total return vs. MSCI World Index (net dividends reinvested) in US dollars. Time periods do not refer to month-end. They are based on dates corresponding to market declines of more than 5%. Data is from CME Group’s listing date, 6 December 2002 to 30 September 2019. Relative returns are calculated arithmetically. Sources: FactSet, MSCI

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Matt Reynolds
Matt Reynolds
Investment Director
Capital Group

Matt Reynolds is an Investment Director at Capital Group. He has over 20 years of industry experience including head of Australian equities – core at Colonial First State Global Asset Management. He holds a bachelor's degree in Economics from The...

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