The market’s blind spot

In recent years, a relatively small number of exceptionally successful companies have driven market returns. Today, around two-thirds of the MSCI ACWI is invested in US equities, while technology represents its largest sector exposure. That concentration has rewarded investors handsomely.

But concentration changes the diversification question.

For much of the past decade, investors were rewarded for allocating capital to a relatively small number of dominant businesses. In hindsight, that was largely the right thing to do. The companies driving market returns were also among the most innovative, profitable and cash-generative businesses in the world. 

In my view, many of the most important structural changes in the global economy are taking place outside the companies currently dominating indices.

AI isn’t just a technology story

Artificial intelligence (AI) is a good example. Most of the debate understandably centres on semiconductors, software and the companies building large language models. 

But I think investors spend far less time thinking about the physical infrastructure that makes AI possible. 

AI is ultimately a real-world story as much as a digital one. Behind every AI query sits a vast network of data centres, power infrastructure, transmission networks, cooling systems and raw materials. 

As AI adoption accelerates, electricity demand from data centres is expected to rise significantly over the coming decade. The International Energy Agency estimates that global electricity demand from data centres could more than double by 2030, driven largely by AI. Meeting that demand will require substantial investment in power generation, grids and infrastructure, as well as the companies helping to build them.

Foundations matter

I see a similar dynamic in the energy transition and in electrification. 

While investors often focus on electric vehicles, battery technologies or renewable energy developers, the foundations of electrification can be overlooked. Yet these foundations are attracting some of the largest capital investments in the global economy.

Global electricity grids alone are expected to require more than US$400 billion of annual investment, as countries connect renewable power, electrify transport and accommodate rising electricity demand. Under current policy settings, demand for key energy-transition minerals is expected to more than double by 2050. 

Copper, aluminum, lithium and rare earths may not attract the same attention as the technologies they enable. But without them, many of those technologies simply don’t exist. 

Putting it together

What these themes have in common is that they are attracting enormous amounts of capital.

Yet they often occupy only a modest place within traditional market indices. Basic materials, for example, account for just around 2% of the MSCI ACWI, despite supplying many of the inputs required to support AI, electrification and industrial expansion. Many investors are underweight the sector relative even to that small index representation. 

As a result, some of the companies that provide critical materials and infrastructure trade at valuations that are far less demanding than the technology stocks that have dominated market performance in recent years.

I’m not arguing investors should abandon the companies that have led the markets for the last decade. That would be foolhardy.

The technologies capturing investors' attention are important.

But I believe some of the biggest opportunities of the next decade may lie in the companies building the foundations beneath them.

Important information

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