BlackRock Says To Invest In These Five “Mega-Forces”. (And, Yes, AI’s One Of Them)

A few years ago, it seemed like you could invest in just about any stock and sit back and watch your hefty returns roll in. But those halcyon days of low inflation, low volatility, and stable growth are gone – and a more volatile macroeconomic scene has taken its place. That’s why BlackRock, in its midyear outlook report, is suggesting a choosier approach, with a focus on five “mega-force” investing themes.

What are the mega-forces and why are they important now?

US stocks tend not to travel in a pack the way they used to. Check out this chart: it shows the range of US stock returns within the Russell 1000 index (orange line). From 2009 until 2019, the average stock price dispersion was just 25% (yellow line), but since then, it’s shot significantly higher, to 35% (green line).

The range of returns for stocks in the Russell 1000, by year. Source: BlackRock.

To find investments that might thrive in a market where not every stock’s a winner, BlackRock offers this idea: focus on the mega-forces – the big, worldwide themes that are going to play out regardless of the macroeconomic picture or the market’s volatility.

BlackRock points out that in the past, investors have tended to underestimate just how quickly a major new theme can take hold and become unstoppable. But, the firm also adds a word of caution here: investors can sometimes get carried away when a new theme enters the zeitgeist, pushing up the prices of its related assets to unjustified levels – AI, awkwardly, springs to mind. So you’ll want to keep a close eye on valuation and remember: even with a rocketing theme like AI, nothing travels in a straight line. There will always be dips along the way.

Now let’s dig into the five themes BlackRock says you’ll want to invest in.

1. AI and the great big digital disruption

Unsurprisingly, AI’s up first. The speed at which this theme has come to dominate the investment narrative has been jaw-dropping. Virtually no one was talking about it six months ago and now you can’t keep the letters “A” and “I” out of CEOs’ mouths.

The number of times “AI” was mentioned in companies’ quarterly earnings calls, over time. Source: BlackRock.

How AI ultimately shapes the world is yet to be seen. And there are bound to be many ways that firms can benefit or lose that we can’t predict at this point. So for now, BlackRock suggests focusing on a few areas. First, the “pick and shovel” tools – think: semiconductors – that power AI technology. Second, the firms with workforces that could be replaced by cheaper AI technology. And third, any company that owns a huge amount of data. It’s often said that data is the oil of the digital economy, and BlackRock sees data as being worth its terabytes’ weight in gold when AI is set loose, analyzing and creating opportunities.

BlackRock’s got a series of thematic ETFs within its vast iShares offering, and one that stands out here is the iShares Robotics and Artificial Intelligence Multisector ETF (ticker: IRBO, expense ratio: 0.47%).

2. A more fragmented world

After 60-some years that saw world trading increase and economies become more intertwined, the globalization trend has been thrown into reverse. In fact, BlackRock notes that world trade as a percentage of global economic growth has been moving lower for over a decade.

Global trading as a percentage of economic growth, (as represented by worldwide gross domestic product, or GDP) by year. Source: BlackRock.

And the geopolitical wrangling of the past few years has only further convinced BlackRock that the world will be less harmonized for a while yet. What that means is more alliances, with different groups of countries huddling together, and more protectionist policies aimed at boosting home-grown demand. BlackRock points out that the developed economies will likely push to become less reliant on the emerging world and pursue self-sufficiency in areas like technology and energy. That should spur a lot of new investment and present opportunities. I mean, just look at the billions of dollars the US government is spending on semiconductor manufacturing capacity. US semiconductor firms like Texas Instruments (TXN), or Taiwan-based firm TSMC are set to benefit from that funding, so you could consider buying their shares. You could also consider a semiconductor ETF like the iShares Semiconductor ETF (ticker: SOXX; expense ratio: 0.35%). And with heightened tensions, especially between the US and China, it seems likely that countries won’t rush to cut their defense spending anytime soon, which would give a boost to firms operating in that industry. There’s a whole host of US defense companies that might be worth a look: Raytheon Technologies (RTX) – which also owns the Pratt & Whitney aircraft engine business – or Lockheed Martin (LMT) – F35 fighter jet maker – are two.

3. The low-carbon transition

There’s no doubt that the low-carbon transition is underway and will probably only gather steam, but until now there have been very few beneficiaries. Tesla shareholders are afforded a wry smile at that statement, sure, but think about it: beyond Tesla, what other companies have seen monster gains? Now, that’s not stopping BlackRock, which is developing a framework called the BlackRock Investment Institute Transition Scenario (BIITS) to help people track the transition and its investment implications. BlackRock estimates that the real opportunities will come when the cost of low-carbon energy dips below that of dirty energy. At that point, it says, massive amounts of investment cash will flock into this theme, unlocking boatloads of investment opportunities. Those tipping points will happen at different times in different places, so the firm’s keeping a close eye on it all.

4. Aging populations

Aging populations pose a massive problem for governments. As older people retire and aren’t replaced one-for-one with younger people, the workforce shrinks. That leaves fewer people to pay income taxes – and therefore, less income for governments to spend on the growing demand for things like healthcare and pension payouts. That could force countries into borrowing more at a time when both inflation and interest rates are higher. Watch out for Japan, then, whose working population is set to fall by more than 10% by 2035, according to BlackRock. Europe’s labor force is also set to slim rapidly, as is China’s – but in the US, the number of workers is expected to keep growing, helped by immigration.

How the working-age population is projected to change between 2020 and 2025, broken down by region and affluence level. Source: BlackRock.

But older people spend, too, on things like holidays and private healthcare. Over time, that should benefit firms in the travel and leisure industry and across the healthcare sector, according to BlackRock. You might consider cruise line companies Royal Caribbean or Carnival. Cruise vacations are popular with older travelers and while these stocks aren’t for the faint of heart – they’re highly cyclical and get buffeted by the economic cycle and by fuel price swings – they do operate in a highly consolidated industry and should benefit from a wave of demand growth.

5. The future of finance

Banking turmoil and the speed at which several banks collapsed earlier this year will have ripple effects that span years, BlackRock says. What’s more, after a wave of disruptive technology in the financial sector, people and firms can now get all their banking needs from non-banks. About $1 trillion was pulled out of the US banking sector this year after the mini-banking crisis, much of it parked in money market funds. BlackRock expects private lending to prosper as folks shun their banks and look for other ways to borrow. So the firm’s loudest message is to beware of investing in the banks themselves. It sees an era of increased regulatory scrutiny and higher costs ahead. And all of that makes for a pretty harsh environment for banks.