Early in 2025, concerns emerged about inflation, geopolitical risk, interest rates, consumer confidence, business spending and valuations, however as the year progressed, concerns have eased with companies consistently delivering reasonable results.
Company earnings results have been particularly strong in areas of technology, industrials, biotech, construction, aerospace and defence, metals and mining and utilities. This breadth of performance, across multiple sectors and sub-industries, supports a positive outlook for 2026. Broad earnings growth should support the global equity market to maintain current valuation multiples.
The outlook for global mid-caps remains attractive with current expectations for 2026 of around 9 per cent earnings growth for the MSCI Global Mid Cap Index (the Index), a very healthy return on equity level of 15% and reasonable index valuations at 18x price to earnings ratio (PER).
As companies and governments spend more on productivity improvements or AI tools, the breadth of applications within technology continues to expand into almost all sectors around the world.
The Index’s free cash flow yields in the 5% range* remain relatively in line with historical averages and a contrast to the historically low below 4% free cash flow yields in global large caps, which are dominated by US mega tech companies.
The Global Future Leaders Strategy is exposed to a range of companies across a broad selection of industries using our diligent security selection approach. As an aggregation of these stock specific opportunities, the strategy has solid exposure to industrials, information technology, consumer discretionary, financials, healthcare and communication services.
Within the industrial sector, we own a diverse range of businesses. These range from companies engineering critical components for manufacturing, companies creating electronic and electromechanical instruments for sophisticated testing, consulting services to the AI industry, and software and hardware developers, to mention a few.
These companies are all playing critical and leading technical roles in their sectors. They are trusted and respected brands - whether they be a component supplier or consultant advising on a multibillion-dollar project.
Technology is a broad sector that continues to dominate the imagination as the change agent for our future world as individuals, businesses and governments. We own companies exposed to advertising technology, creators of hazard and life protection technology products, credit checking; software solution for cloud platform leveraging, IT consulting and IT implementation, semiconductors-related businesses amongst others.
As companies and governments spend more on productivity improvements or AI tools, the breadth of applications within technology continues to expand into almost all sectors around the world.
Consumer trends have been quite patchy globally. We have been selective in our exposure, and the strategy maintains positions across a range of themes such as travel technology, luxury, agricultural distributors, specialist retailers and US housing.
Financial services remain an attractive area of interest, and we maintain a broad exposure to providers in insurance, private credit, private equity, exchanges, payment services and banking. Growth, good risk management and industry leadership is critical in this sector where businesses are built on trust and robust processes.
Our healthcare exposure concentrates on specialist medical device companies operating in markets with only a few leaders. This market structure helps to promote innovation and long duration industry positions, raising the barriers to entry for new entrants.
Exposure to communication services is mainly via technology-based leaders in software for the residential, auto and gaming marketplaces.
As at 20 November 2025, the portfolio is trading at a moderate premium to the valuation of the market, which is pleasing given its higher quality, higher growth, superior balance sheets, higher returns on equity and higher persistency of its earnings stream.
Compelling themes emerging in global small- and mid-caps
AI is a dominant and compelling theme that transcends across technology, industrials, energy and utilities. There is an enormous amount of capital expenditure needed to fund the AI infrastructure - from the power supply for data transfer, switches and data centres, software and semiconductors, as well as the consultants and industrial services, which will drive activity for many years to come.
Big tech capital expenditure is approaching US$350-400 billion, spread across many industries, with winners and losers emerging from the AI thematic. “AI losers” are stocks facing significant pressure from AI and a number of these companies have experienced significant multiple compression from 25x PER down to 5x.
This contrasts with “AI winners” that are a part of the AI build-out. Many of these stocks have re-rated from 15-20x PER towards 40x with sales growth compounds over multiple years at higher rates than history, and subsequent higher earnings and higher returns on capital being rewarded by investors through valuation multiple expansion.
There are themes beyond AI in financials, such as private equity, private credit, global exchanges and financial services, where the leaders in these industry segments continue to grow top lines, grow market share and innovate into new areas. The insurance sector has generally continued to perform well with good insurance margins and insurance brokers benefiting from industry tailwinds.
Consumer companies that can lead with technology, and benefiting from an improved industry backdrop, such as Expedia in the travel industry, have been able to improve return profiles and the market has rewarded this with higher multiples. Some retailers have positioned themselves well in a patchy consumer marketplace and the changing nature of consumer preferences rewards those that can capture the imagination of consumers as well as execute effectively.
Navigating volatility
We maintain a balanced portfolio approach that is blended across a variety of style factors such as:
- Quality compounders - high return companies, long duration industry leaders
- Cyclical winners - experiencing an upward trajectory in earnings profile from industry tailwinds, commodity prices, higher volumes, higher prices, higher industry margins
- Momentum winners – part of theme such as AI, USA reshoring, electrification or AI infrastructure
- Turnarounds – management led improvement in company fundamental performance due to improved processes, leadership changes, business unit changes, balance sheet changes
- Value trades – bottom of cycle valuation appeal with likely catalysts to improvement from management, industry dynamics shift, sentiment improvements or earnings drivers moving positive
This blend of company styles allows us to navigate markets that have been dominated by quality, value as well as themes or economic recovery. We call this portfolio construction approach QVTM – quality, value, transition and momentum.
As noted above, we have exposure to a broad range of industries while maintaining a strong valuation discipline to create a balanced quality portfolio that has exposure to a broad range of positive trends and themes.
*As at August 2025
