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Time to look ‘off the beaten path’ for growth: Franklin Templeton

The incredible performance of the Magnificent Seven mean investors aren’t always seeing the technological growth that’s driving industries like professional services, construction and medicine.
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Investors are having a hard time tearing their eyes (and wallets) away from the market leading Magnificent Seven, but it might be time for them to do just that.

Because while it’s not certain what the pivot point will be – maybe increasing competition, maybe a geopolitical shock – the breadth of market performance will increase, according to Franklin Templeton portfolio manager Patrick McKeegan, and investors need to look beyond the big tech companies for growth.

“What you’re seeing is that valuation disparity start to stack the deck to other opportunities in the market,” McKeegan told The Inside Network’s Equities and Growth Symposium. “And if you look at it everything feels like smooth sailing right now, but you have intense competition amongst those companies; companies like Nvidia are benefitting from pricing power in more competitive environments, things like that will tend to go away.”

  • In mid- and large-cap stocks, that leaves the floor open for “innovators, disruptors and the primacy of pure plays”, McKeegan said.

    “Viewing the Magnificent Seven in a traditional sense, you can see that exposure is very concentrated in areas like tech hardware and media and software – but that there are a number of attractive opportunities, like financial or professional services, that aren’t represented.”

    The best outsized rewards over the longer-term stem from investors considering competitive advantages and barriers to entry, McKeegan said, as well as a focus on finding “choke points” – areas where there are only going to be a few companies that can extract a return from an attractive theme.

    Digital transformation is still in its early stages in a number of industries, including the public sector and construction, which have both been slower to digitise but are now seeing an acceleration as access to mobile computing increases. Then there are companies that are enabling more environmentally friendly construction practices – and more efficient construction processes – that are gaining significant traction.

    In robotic surgery, open surgeries are being replaced with procedures that come with less pain, faster recovery and better care outcomes, while precision medicine is advancing in leaps and bounds.

    “The market has been preoccupied with a handful of themes,” McKeegan said. “But I think that right now there are a number of changes in the global economy that are creating opportunities for investors willing to look a little bit more off the beaten path.”

    McKeegan name checked companies like Amadeus, a leader in travel technologies that took a substantial hit during Covid but prepared itself better than competitors for the end of the pandemic; Daiichi Sankyo, which owns the “gold standard” therapy for metastatic breast cancer, and has another promising late line therapy for lung cancer in the pipeline; and Manhattan, a leader in supply chain software.

    “Those big tech companies represent some powerful growth drivers in the global economy,” McKeegan said. “But I don’t think they’re the only choice for being exposed to some of those powerful themes.”

    So what could bring the Magnificent Seven back to earth?

    “If you think about what Apple or Google are facing in the EU, they’re seeing greater regulatory scrutiny,” McKeegan said. “These companies are sort of also at the forefront of the trade war. And then you’ve had a fairly benign macroeconomic environment that’s letting business as usual continue here but I think that’s also prone to shocks if you look at the war in Europe in 2022 or the pandemic in 2020; I don’t have a specific catalyst, but that’s what I’m seeing.”

    Staff Writer




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