The 2025 Consumer Electronics Show (CES), held in Las Vegas in January, showcased cutting-edge innovations, including advanced artificial intelligence (AI), decentralized systems, health technology and humanoid robots, all pointing to the future of living, working and experiencing the world. The overarching message was clear: it is all about AI. 

AI has evolved from a standalone category into a technology embedded in nearly every innovation on display. From AI-powered lawn mowers and health diagnostics to next-generation gaming, video editing and customer experience tools, AI has become the core driver of transformation across industries.  

One key theme at the conference is the broadening of AI applications. Generative AI—producing new content such as text, images, audio, and video from learned patterns—has been the major driver behind AI’s growth. Agentic AI, which perceives, reasons, plans, and acts autonomously, is now being deployed in more use cases. An AI agent takes inputs and reasons about them and executes actions to pursue objectives. Physical AI involves interacting with the physical environment, such as robots or embedded AI systems that can manipulate objects or navigate spaces, autonomous drones, warehouse robots, and self-driving cars.

Capex: The Race Is On 

AI needs facilities, machines and power, and all of that has, in turn, fueled its own new spending involving real estate, building materials, semiconductors and energy. Energy providers have seen a huge boost, because data centers require as much power as a small city. In the AI era, capital expenditure (capex) has come to signify what a company spends on data centers and the components they require. The biggest tech players have increased their capex by tens of billions of dollars this year, and they show no signs of pulling back in 2025.

AI demand is quickly broadening away from enterprise software applications. For example, car manufacturers are likely to maintain two factories: one to build the car, and the other to train autonomous vehicles via simulation and synthetic data—every one million autonomous vehicles may require $2-3 billion in data-center capex to support it. This data-center capacity will be used for data collecting, training, and edge-case development to ensure that autonomous vehicles are functioning at their most efficient and safest levels.

AI Computing and Automation Continues to Mature 

CES showcased the rapid evolution of AI and its growing integration into everyday products and services. A major AI company introduced new offerings in personal computing, gaming, robotics and self-driving vehicles. Hardware manufacturers highlighted that advancements in lightweight large language models (LLMs) now enable generative AI capabilities on consumer devices with on-device processing, moving towards ubiquitous AI. 

New innovations in personal computing aim to make AI more accessible. A compact AI supercomputer, the size of a modern laptop, can run 200 billion parameter LLMs, empowering professionals and students alike. Users can develop and deploy models on their desktops or in the cloud seamlessly. Advances in PC hardware supporting AI, combined with a large install base ready for an upgrade, suggest a potential PC refresh cycle in 2025. 

AI Applications Continue to Progress 

As AI hardware gets more efficient, progress on training data and development methods continue to expand AI’s utility. Among the significant announcements at CES was the introduction of models that can generate photorealistic video that developers can use to train their autonomous robots and vehicles at a lower cost than traditional data-collection methods. These models are intended to produce synthetic training data, enabling machines to understand the physical world, much like how LLMs facilitate natural communication for chatbots. This innovation is expected to expand the impacts of AI into robotics research and autonomous driving by addressing the bottleneck of limited data for robotic and self-driving applications.

As vertical specific training data sets proliferate and models become more efficient, agentic AI appears to be much more imminent than previously expected. Numerous attendees highlighted progress in releasing AI assistants, from a system utilizing AI agents to build AI applications that can automate enterprise work, to a simple LLM assisting with the use of household appliances. These AI agents function as knowledge robots capable of reasoning, planning and analyzing large amounts of data to derive real-time insights from various sources such as images, videos and PDF files. While advancements in semiconductors and expansive data center builds have captured a great deal of attention, improvements in data gathering and software architecture have quietly improved model performance to the point where more and more companies are ready to ship to consumers.

Mobility 

This year’s transportation industry exhibitors focused on assisted and autonomous driving technologies, with significant advances in autonomous driving. Companies highlighted progress toward level 4 (L4) systems, which can handle unpredictable surroundings without human intervention. Currently, most available systems are L2 and need human backup. Recent US market expansions and potential favorable regulations have renewed the relevance of autonomous vehicles in public markets. 

CES showcased autonomous tech across various industries, including long-haul trucking. One company revealed progress towards L4 autonomous trucking, logging 50,000 miles in August 2024. Several firms announced partnerships to speed up L4 semi-truck deployment. These advancements highlight autonomous vehicle investment impacts beyond consumer ridesharing into multiple sectors. 

Autonomous vehicle advancement will require improvements in a number of sensor-oriented sub-industries. Light detection and ranging (LiDAR) technology, a cornerstone of autonomous vehicle systems, is experiencing exponential growth in both capability and adoption. CES demonstrations revealed significant price reductions alongside major performance improvements, driving increased integration by automotive manufacturers for both autonomous features and enhanced safety systems. There were additional tech solutions on display that could help accelerate the speed of performance enhancements and the commercialization of driverless vehicle systems.  

Robotics  

AI advancements are accelerating the robotics industry, enabling the rapid advancement in humanoid robots. Once confined to science fiction, these human-like machines were displayed at CES as tangible, market-ready innovations. Humanoids are creating a favorable investment opportunity across a wide value chain including AI chipmakers, AI model developers, sensor developers, makers of systems for connected devices, and essential component and material suppliers.

One CEO investing heavily behind the robotics theme spoke about the next frontier of AI being physical AI. He believes that given the innovation in AI, we can now start infusing AI models with synthetically generated physical world data to exponentially drive the usefulness of robots. Historically, the lack of physical world data made it hard for robots to fully understand our world, but with these breakthroughs, use cases and the ability of these robots to efficiently tackle them, it has become much more tangible.

Displays also showed how humanoid robots can handle dangerous and repetitive warehouse tasks, including moving heavy containers. The first commercially available humanoid designed for warehouse tasks is being used in pilot programs in the warehouses of a large online retailer. The robot’s success has driven such high demand that the manufacturer is constructing a dedicated factory targeting annual production of 10,000 units.

Investment Implications of AI-Driven Innovations

CES 2025 showcased AI-driven innovations that have significant investment implications across multiple industries. The rapid advancement of AI-powered computing and automation is driving capital toward semiconductor development, cloud computing, and edge AI technologies. Increased demand for high-performance chips and AI-optimized hardware is expected to accelerate investment in fabrication facilities, supply-chain resilience, and next-generation computing architectures. Smart home automation, robotics and AI-integrated consumer electronics are poised for strong growth, attracting investment in companies developing energy-efficient, adaptive technology. The rise of AI-driven health-care solutions, including autonomous medical devices and real-time health monitoring, suggests expanding opportunities in digital health, telemedicine, and biotechnology sectors.

Autonomous mobility, AI-powered logistics and predictive maintenance are driving investments in automotive technology, with a strong focus on electric and self-driving vehicles. The integration of AI in creative industries, from content generation to real-time analytics, signals increased funding toward AI-driven enterprise software and automation tools that enhance productivity. Sustainability was a key theme, with AI-enabled energy management and smart grid innovations attracting investments in renewable energy, battery technology, and carbon-reduction solutions. As AI adoption accelerates across industries, investors are focusing on companies positioned to benefit from automation, data analytics, and intelligent systems. The shift toward AI-driven business models is likely to reshape market dynamics, emphasizing long-term growth potential in AI infrastructure, software, and industry-specific applications. CES 2025 reinforced AI as a defining investment trend, presenting opportunities in sectors undergoing digital transformation and technological disruption.

As AI adoption accelerates across industries, investors are focusing on companies positioned to benefit from automation, data analytics, and intelligent systems. The shift toward AI-driven business models is likely to reshape market dynamics, emphasizing long-term growth potential in AI infrastructure, software, and industry-specific applications. CES 2025 reinforced AI as a defining investment trend, presenting opportunities in sectors undergoing digital transformation and technological disruption.

In last year’s blog post, Coming to America: Investing in Utilities, we highlighted the tailwinds for US utility companies that included significant sector dislocation, government decarbonization incentives and investments in energy. However, the winds of change are at work once again, with the same drivers now appearing in Europe. We believe that investors should consider greater exposure to European infrastructure.

The Death of Equity Diversification–A Decade in Review

Global equities have recently hit a series of new all-time highs, as measured by the MSCI World Index, but returns have been led by a handful of large US growth stocks—the ‘magnificent seven’—whose performance has been driven by the promise of future growth from artificial intelligence (AI). These seven stocks have contributed 30% to global equities’ cumulative return of 155% over the past ten years through December 31, 2024, despite comprising only 11% of the benchmark, on average, during the period. The US has contributed 75% of the total returns with an average weight of 56%, while the US information technology sector has contributed 38% of global equity returns, with an average weight of 19%.

Not surprisingly, over the past ten years the US grew from 51% of the global equity market to 65%, while Europe decreased from 22% to 14%. Information technology increased from 14% to 26% of the MSCI World Index, while the combined weight of the industrials, utilities, energy and materials sectors fell from 27% to 20%. 

The narrowness of the market rally was even more pronounced in the US, where the magnificent seven stocks contributed 29% of the S&P 500® Index’s cumulative 242% return over the previous ten years through December 31, 2024. The information technology sector grew from 19% of the S&P 500 to 33% over the same period and contributed 42% of S&P 500’s return despite an average weight of 25%. Together, the weight of the industrials, utilities, energy and materials sectors has fallen from 25% of the S&P 500 ten years ago to 15.5% at the end of 2024. The four infrastructure-exposed sectors started 5% bigger than information technology and ended 17% smaller.

New record highs would suggest that the entire US equity market is expensive. However, lack of market breadth has been the key story of the equity rally. The substantial weighting of these stocks has posed a challenge for investors who rely on the S&P 500 for diversification. Specifically, infrastructure stocks have become notably underrepresented within a typical S&P 500 equity allocation.

We suggest that investors seeking greater diversification should consider the infrastructure sector and specifically should look to European infrastructure where valuations have not been amplified by the expensive AI power boom.

2024 in Review

In the year since we published Coming to America: Investing in Utilities, in which we laid out our case for infrastructure investment within the US, the valuation dispersion between US and European utilities has grown. Over the calendar year 2024, the S&P 500 utilities sector appreciated 27% while European utilities were flat. A key driver of the US appreciation and relative outperformance was the significant capital expenditure of US mega-cap technology companies to support the build-out of the AI ecosystem. These investments in infrastructure, especially related to power, show no signs of stopping. Independent power producers and electric-utilities companies have been among the biggest beneficiaries due to the rising demand for electricity. Hyperscalers’ willingness to secure power at above-market rates also plays a role as they seek to ensure the powering of large data centers in support of their AI aspirations.

So, why do we believe now is a good time to allocate to Europe?

European Competitiveness  

The key reasons we believe there is opportunity for active managers in European utilities are identical to the reasons we were bullish on the US in 2024:

1. Government incentives aimed at decarbonization can provide tailwinds for renewables-exposed utilities.
2. We believe there is a significant sector dislocation in European utilities, potentially unlocking opportunity for active managers.
3. We believe electrification and investments in energy independence may continue to drive European electric and gas utilities.

European Government Support

We believe that infrastructure support for AI is a global goal essential for maintaining competitiveness in leading-edge technology. In addition, due to data privacy concerns, we believe countries will want to control their own technology and data, which will require them to build data centers domestically. Europe has fallen behind technology leaders in the US and China, and European officials have become more vocal about the need to act. In January 2025, the areas we feel could provide support for European utilities, initially through sentiment and then through revenue and earnings growth, were outlined in the European Commission’s report, A Competitiveness Compass for the EU. In the report, the Commission concludes that Europe “must act now to regain its competitiveness and secure its prosperity.” It cites Europe’s inability to keep pace with other major economies over the past two decades, especially relative to the US in advanced technology owing to a lack of innovation and high regulations.[1] The report outlines key areas of focus and newly instituted acts for the next five years to “reignite economic dynamism,” which we believe will benefit European utilities and other infrastructure companies:

AI Factories Initiative, Q1 2025, and EU Cloud and AI Development Act, Q4 2025-Q1 2026: “Europe needs the computing, cloud and data infrastructures that AI leadership requires…the initiative establishes ‘AI factories’ to boost Europe’s computing power… the Commission will mobilize public and private initiative to establish new AI Gigafactories specialized in training of very large AI models enabling key AI ecosystems throughout the EU.”

Digital Networks Act, Q4 2025: “Closing the innovation gap will require investment in state-of-the-art digital infrastructure, including modern fiber networks, wireless and satellite solutions, investments in 6G and cloud computing capabilities… To correct course, a Digital Networks Act will propose solutions to improve market incentives to build the digital networks of the future.”

Industrial Decarbonization Accelerator Act, Q4 2025, and Electrification Action Plan and European Grids Package, Q1 2026: “This dependence (reliance on fossil fuel for 2/3 of its energy) can only be reduced over time, as a greater share of energy is produced from decarbonized generation in Europe. The EU must thus accelerate the clean energy transition and promote electrification” and “Europe must invest more in modernizing and expanding its network of energy transmission and distribution infrastructure, accelerating investment in electricity, hydrogen and carbon dioxide transport networks as well as storage systems.”

Valuations Favor Europe

In the past 11 months, price-to-earnings (P/E) ratios of US utilities have rerated by 17% versus 3% for their European counterparts. European utilities currently trade at a 31% P/E discount relative to US utilities, which is more than twice as large as the long-term average of 15%.

European Utilities P/E Discount (-) / Premium (+) Relative to US Utilities

Yield Spreads

Given the movement in markets, the spread between dividend yields of European and US utilities has moved from 20 basis points (bps) to 220 bps over the past four years, creating opportunities to find promising value investment opportunities in the European utilities sector. This is especially pertinent given the secular tailwinds we expect in the coming year(s), which are identical to the tailwinds that are currently playing out in US markets and driving shares across the infrastructure space.

Dividend Yields and Spread: US vs. Europe

Based on the strength of the US utilities sector driven by the AI power boom, and relative valuations, we have increased our conviction within Europe. 

Data Centers Should Create Value

Data-center power demand is surging as the need for greater computing power grows, driven by digitalization, cloud migration and AI. AI is a major contributor to this demand due to its significantly higher power-density requirements stemming from the latest generation of graphics processing unit (GPU) chipsets.

While the growth in data-center build-out may likely be strongest in the US, Europe has ample opportunity to grow its market and further stimulate its technology ecosystem in three key areas:

Increased electricity demand: Data centers are likely to drive a significant rise in power consumption, creating long-term revenue growth opportunities for utilities.

Acceleration of green-energy investments: The shift toward sustainability will spur investment in renewable energy, grid modernization and energy storage solutions.

New infrastructure development: Expanding transmission networks and upgrading substations will be necessary, creating opportunities for infrastructure projects.

Power Demand for Data Centers is Projected to Rise Materially in Europe

Utility companies that proactively invest in renewable energy, grid capacity and innovative solutions like demand response and energy storage should be well positioned to capitalize on data-center growth. Strategic partnerships with data-center operators and governments will also be crucial to ensuring a stable and sustainable power supply. The most successful European utilities will likely be those that can balance rapid infrastructure expansion with the transition to renewable energy sources, while navigating complex regulatory environments and managing water resources effectively.

Nordic Countries to Benefit

We believe the Nordic countries (Sweden, Norway, Finland, Denmark and Iceland) are exceptionally well positioned to capitalize on the data-center and AI boom for several compelling reasons.

Norway and Sweden have extensive hydropower infrastructure, providing stable, renewable baseload power. Denmark is a leader in wind energy, with offshore wind farms supplying growing portions of its grid. Finland has a diverse energy mix including nuclear, hydro and biomass, which allows data centers to meet their sustainability commitments due to the renewable-rich mix.

The Nordic Region is a Source for Competitive and Clean Energy

Nordic Power Demand is Driven by Decarbonization and Electrification

Cold ambient temperatures for six to eight months of the year dramatically reduce cooling costs, which typically account for 40% of data-center energy consumption. Several facilities in the region use “free cooling” techniques, drawing cold air or water directly from the environment, representing significant operational cost savings compared to facilities in warmer regions.

Strong regulatory frameworks provide assurance for long-term infrastructure investments, and there is low geopolitical risk compared to many other regions. Additionally, transparent business practices as well as strong workforce education levels and technical expertise, contribute to political and economic stability in the region.

The region boasts excellent fiber-optic infrastructure connecting to major European markets and proximity to submarine cable landing stations for international connectivity. Its strategic position linking Europe to North American markets also enhances its connectivity advantage. Sweden’s “Node Pole” region has attracted major investments from US tech companies.

Norway offers low electricity prices, often 50% lower than the EU average, and 98% renewable generation. Finland provides tax incentives specifically for data centers and direct connections to Russian and Baltic markets. Denmark benefits from strong interconnection with the German grid, providing stability. Iceland has unique geothermal energy resources and 100% renewable electricity.

Seeking Greener Pastures

The global economy is increasingly driven by rapid advancements in technology and infrastructure, with AI and data centers at the forefront. As the demand for energy and technological connectivity grows, strategic investments in infrastructure, particularly renewable energy and grid modernization, become crucial. In our view, Europe, with its government support, competitive advantages and commitment to decarbonization, is well positioned to capitalize on these trends.

In our view, utilities and infrastructure companies that embrace innovation and sustainability should thrive in this evolving landscape. The Nordic countries, with their renewable energy resources, favorable climates and regulatory stability, stand out as leaders in this sector. Investors seeking diversification and growth opportunities should consider the potential of European infrastructure, as it offers promising return potential and can contribute to a more resilient future.

In summary, the intersection of technology and infrastructure presents a unique opportunity for growth and innovation. By investing wisely and strategically, Europe can regain its competitive edge and pave the way for a prosperous future.

[1] Source: European Commission, https://commission.europa.eu/document/download/10017eb1-4722-4333-add2-e0ed18105a34_en

In 2024, we believed there were tailwinds for US utility companies that included significant sector dislocation, government decarbonisation incentives and investments in energy. However, the winds of change are at work once again, with the same drivers now appearing in Europe. We believe that investors should consider greater exposure to European infrastructure.

The death of equity diversification – A decade in review

Global equities have recently hit a series of new all-time highs, as measured by the MSCI World Index, but returns have been led by a handful of large US growth stocks—the ‘magnificent seven’—whose performance has been driven by the promise of future growth from artificial intelligence (AI). These seven stocks have contributed 30% to global equities’ cumulative return of 155% over the past ten years to 31 December 2024, despite comprising only 11% of the benchmark, on average, during the period. The US has contributed 75% of the total returns with an average weight of 56%, while the US information technology sector has contributed 38% of global equity returns, with an average weight of 19%.

Not surprisingly, over the past ten years the US grew from 51% of the global equity market to 65%, while Europe decreased from 22% to 14%. Information technology increased from 14% to 26% of the MSCI World Index while the combined weight of the industrials, utilities, energy and materials sectors fell from 27% to 20%. 

The narrowness of the market rally was even more pronounced in the US, where the magnificent seven stocks contributed 29% of the S&P 500® Index’s cumulative 242% return over the ten years through to 31 December 2024. The information technology sector grew from 19% of the S&P 500 to 33% over the same period and contributed 42% of S&P 500’s return despite an average weight of 25%. Together, the weight of the industrials, utilities, energy and materials sectors has fallen from 25% of the S&P 500 ten years ago to 15.5% at the end of 2024. The four infrastructure-exposed sectors started 5% bigger than information technology and ended 17% smaller.

New record highs would suggest that the entire US equity market is expensive. However, lack of market breadth has been the key story of the equity rally. The substantial weighting of these stocks has posed a challenge for investors who rely on the S&P 500 for diversification. Specifically, infrastructure stocks have become notably underrepresented within a typical S&P 500 equity allocation.

We suggest that investors seeking greater diversification should consider the infrastructure sector and specifically should look to European infrastructure where valuations have not been amplified by the expensive AI power boom.

2024 in review

The valuation dispersion between US and European utilities has recently grown. Over the calendar year 2024, the S&P 500 utilities sector has appreciated 27% while European utilities were flat. A key driver of the US appreciation and relative outperformance was the significant capital expenditure of US mega-cap technology companies to support the build-out of the AI ecosystem. These investments in infrastructure, especially related to power, show no signs of stopping. Independent power producers and electric-utilities companies have been among the biggest beneficiaries due to the rising demand for electricity. Hyperscalers’ willingness to secure power at above-market rates also plays a role as they seek to ensure the powering of large data centres in support of their AI aspirations.

So, why do we believe now is a good time to allocate to Europe?

European competitiveness  

The key reasons we believe there is opportunity for active managers in European utilities are identical to the reasons we were bullish on the US in 2024:

1. Government incentives aimed at decarbonisation can provide tailwinds for renewables-exposed utilities.
2. We believe there is a significant sector dislocation in European utilities, potentially unlocking opportunity for active managers.
3. We believe electrification and investments in energy independence may continue to drive European electric and gas utilities.

European government support

We believe that infrastructure support for AI is a global goal essential for maintaining competitiveness in leading-edge technology. In addition, due to data privacy concerns, we believe countries will want to control their own technology and data, which will require them to build data centres domestically. Europe has fallen behind technology leaders in the US and China, and European officials have become more vocal about the need to act. In January 2025, the areas we feel could provide support for European utilities, initially through sentiment and then through revenue and earnings growth, were outlined in the European Commission’s report, A Competitiveness Compass for the EU. In the report, the Commission concludes that Europe “must act now to regain its competitiveness and secure its prosperity”. It cites Europe’s inability to keep pace with other major economies over the past two decades, especially relative to the US in advanced technology owing to a lack of innovation and high regulations.[1] The report outlines key areas of focus and newly instituted acts for the next five years to “reignite economic dynamism”, which we believe will benefit European utilities and other infrastructure companies:

AI Factories Initiative, Q1 2025, and EU Cloud and AI Development Act, Q4 2025-Q1 2026: “Europe needs the computing, cloud and data infrastructures that AI leadership requires…the initiative establishes ‘AI factories’ to boost Europe’s computing power… the Commission will mobilise public and private initiative to establish new AI Gigafactories specialised in training of very large AI models enabling key AI ecosystems throughout the EU.”

Digital Networks Act, Q4 2025: “Closing the innovation gap will require investment in state-of-the-art digital infrastructure, including modern fibre networks, wireless and satellite solutions, investments in 6G and cloud computing capabilities… To correct course, a Digital Networks Act will propose solutions to improve market incentives to build the digital networks of the future.”

Industrial Decarbonisation Accelerator Act, Q4 2025, and Electrification Action Plan and European Grids Package, Q1 2026: “This dependence (reliance on fossil fuel for 2/3 of its energy) can only be reduced over time, as a greater share of energy is produced from decarbonised generation in Europe. The EU must thus accelerate the clean energy transition and promote electrification” and “Europe must invest more in modernising and expanding its network of energy transmission and distribution infrastructure, accelerating investment in electricity, hydrogen and carbon dioxide transport networks as well as storage systems.”

Valuations favour Europe

In the past 11 months, price-to-earnings (P/E) ratios of US utilities have rerated by 17% versus 3% for their European counterparts. European utilities currently trade at a 31% P/E discount relative to US utilities, which is more than twice as large as the long-term average of 15%.

European utilities P/E discount (-) /premium (+) relative to US utilities

Yield spreads

Given the movement in markets, the spread between dividend yields of European and US utilities has moved from 20 basis points (bps) to 220 bps over the past four years, creating opportunities to find promising value investment opportunities in the European utilities sector. This is especially pertinent given the secular tailwinds we expect in the coming year(s), which are identical to the tailwinds that are currently playing out in US markets and driving shares across the infrastructure space.

Dividend yields and spread: US versus Europe

Based on the strength of the US utilities sector driven by the AI power boom, and relative valuations, we have increased our conviction within Europe. 

Data centres should create value

Data-centre power demand is surging as the need for greater computing power grows, driven by digitalisation, cloud migration and AI. AI is a major contributor to this demand due to its significantly higher power-density requirements stemming from the latest generation of graphics processing unit (GPU) chipsets.

While the growth in data-centre build-out is likely to be strongest in the US, Europe has ample opportunity to grow its market and further stimulate its technology ecosystem in three key areas:

Increased electricity demand: Data centres are likely to drive a significant rise in power consumption, creating long-term revenue growth opportunities for utilities.

Acceleration of green-energy investments: The shift toward sustainability will spur investment in renewable energy, grid modernisation and energy storage solutions.

New infrastructure development: Expanding transmission networks and upgrading substations will be necessary, creating opportunities for infrastructure projects.

Power demand for data centres is projected to rise materially in Europe

Utility companies that proactively invest in renewable energy, grid capacity and innovative solutions like demand response and energy storage should be well positioned to capitalise on data-centre growth. Strategic partnerships with data-centre operators and governments will also be crucial to ensuring a stable and sustainable power supply. The most successful European utilities are likely to be those that can balance rapid infrastructure expansion with the transition to renewable energy sources, while navigating complex regulatory environments and managing water resources effectively.

Nordic countries to benefit

We believe the Nordic countries (Sweden, Norway, Finland, Denmark and Iceland) are exceptionally well positioned to capitalise on the data-centre and AI boom for several compelling reasons.

Norway and Sweden have extensive hydropower infrastructure, providing stable, renewable baseload power. Denmark is a leader in wind energy, with offshore wind farms supplying growing portions of its grid. Finland has a diverse energy mix including nuclear, hydro and biomass, which allows data centres to meet their sustainability commitments due to the renewable-rich mix.

The Nordic region is a source for competitive and clean energy

Nordic power demand is driven by decarbonisation and electrification

Cold ambient temperatures for six to eight months of the year dramatically reduce cooling costs, which typically account for 40% of data-centre energy consumption. Several facilities in the region use ‘free cooling’ techniques, drawing cold air or water directly from the environment, representing significant operational cost savings compared to facilities in warmer regions.

Strong regulatory frameworks provide assurance for long-term infrastructure investments, and there is low geopolitical risk compared to many other regions. Additionally, transparent business practices as well as strong workforce education levels and technical expertise, contribute to political and economic stability in the region.

The region boasts excellent fibre-optic infrastructure connecting to major European markets and proximity to submarine cable landing stations for international connectivity. Its strategic position linking Europe to North American markets also enhances its connectivity advantage. Sweden’s ‘Node Pole’ region has attracted major investments from US tech companies.

Norway offers low electricity prices, often 50% lower than the EU average, and 98% renewable generation. Finland provides tax incentives specifically for data centres and direct connections to Russian and Baltic markets. Denmark benefits from strong interconnection with the German grid, providing stability. Iceland has unique geothermal energy resources and 100% renewable electricity.

Seeking greener pastures

The global economy is increasingly driven by rapid advancements in technology and infrastructure, with AI and data centres at the forefront. As the demand for energy and technological connectivity grows, strategic investments in infrastructure, particularly renewable energy and grid modernisation, become crucial. In our view, Europe, with its government support, competitive advantages and commitment to decarbonisation, is well positioned to capitalise on these trends.

In our view, utilities and infrastructure companies that embrace innovation and sustainability should thrive in this evolving landscape. The Nordic countries, with their renewable energy resources, favourable climates and regulatory stability, stand out as leaders in this sector. Investors seeking diversification and growth opportunities should consider the potential of European infrastructure, as it offers promising return potential and can contribute to a more resilient future.

In summary, the intersection of technology and infrastructure presents a unique opportunity for growth and innovation. By investing wisely and strategically, Europe can regain its competitive edge and pave the way for a prosperous future.

[1] Source: European Commission, https://commission.europa.eu/document/download/10017eb1-4722-4333-add2-e0ed18105a34_en

Paul Stimers, partner at Holland & Knight and founder of the Quantum Industry Coalition, joins Double Take to jump into the quantum advantage, cybersecurity implications and the future of this groundbreaking technology.

The podcast is intended for investment professionals ONLY and should not be construed as investment advice or a recommendation. Any stock examples discussed are given in the context of the theme being explored and the views expressed are those of the presenters at the time of recording.

Listen on

In late 2024, we made a case for US large-cap value investing in The Time Is (Always) Right for Value Investing. We believed that a return to a pre-2008 global financial crisis macro environment would normalize growth/value performance. Second, we observed a rising concentration risk, as equity markets—and investor portfolios—were increasingly exposed to the “magnificent seven” (M7), a narrow group of expensive large-cap growth stocks. We argued for rebalancing, rather than fully rotating, toward US large-cap value as we did not see an obvious catalyst for a change in market leadership.

In our 2025 outlook, we reiterated our recommendation to rebalance as the supporting factors were unchanged in our view. Today, however, we are seeing evidence that some of the key drivers of growth leadership, such as aggressive US monetary-policy easing and US leadership in artificial intelligence (AI) development, are softening. This has led to large cap growth’s performance lagging value year to date. While this period is short, it emphasizes the importance of maintaining a balanced allocation to include US large-cap value.

Investors Starting to Embrace “Higher for Longer”

Already in 2025, the Federal Reserve (Fed) held its January meeting and Fed Chair Powell appeared before Congress in February for his semiannual testimony. In both instances, he reiterated that the central bank “doesn’t need to rush to adjust interest rates” and would be “patient before lowering borrowing costs further.” The Fed’s message was quickly reflected in market-based expectations. 

As the chart below illustrates, the 2-year US Treasury yield, which traded below the fed funds rate for over a year on the expectation that interest rates would be moving lower imminently, has recently converged with the fed funds rate.

US Federal Funds Rate vs US 2-year Treasury Yield

In addition, the market-implied fed funds rate indicates that investors now expect rates to fall later and less than previously thought. In August 2024, the market expected the rate to be 4% by January 2025. However, following the January Fed meeting and Chair Powell’s February testimony, the market now anticipates reaching 4% by December 2025, almost a full year later.

Current Federal Funds Rate vs Market Implied Federal Funds Rate

Changes in interest-rate expectations have typically been a big driver of relative style performance, but it has been particularly pronounced since the global financial crisis. The Fed’s low- and zero-interest rate policy helped growth outperform value in the 12 years leading up to the Covid-19 pandemic, and again after inflation peaked in 2022. With interest-rate expectations beginning to reflect the Fed’s higher-for-longer stance, we think value-oriented securities are poised to deliver competitive returns relative to growth.

Magnificent Seven Taking a Breather?

US equity market gains over the past year were driven primarily by the M7. More recently, a subset has separated themselves owing to their leadership in AI innovation, development and spending. Lately, however, these stocks have taken a bit of a breather as investors review their assumptions about US leadership in AI. The key catalyst for this was the emergence of Chinese AI developer DeepSeek, which boasted a new platform that is reportedly more economic and energy-efficient than its US counterparts. 

One-Year Performance of the Magnificent Seven vs the S&P 500® Equal-Weighted Index

Investors are likely to further scrutinize the M7 companies’ future earnings growth to determine if expected earnings can still support lofty valuations. Looking at the earnings data through the end of January, this pause among the M7 seems warranted. As the chart below illustrates, earnings growth, while still relatively strong, is forecast to decelerate over the coming year.

Earnings Growth Still Strong, but Decelerating

Meanwhile, earnings growth for the broader market is being revised higher from where consensus expected it six months ago and looks set to accelerate higher through 2026, which would support the case to balance out exposure beyond a small set of companies.

Earnings Growth Accelerating

Conclusion

We believe companies and investors continue to adjust to US inflation and interest rates normalizing—not to pre-Covid levels, but to those before the global financial crisis. We expect inflation to remain higher and more persistent than in the previous 12 years, likely prompting the Fed to keep rates elevated. The macro environment, combined with concentration risk in the M7 stocks, changing momentum in earnings growth and concerns about lofty valuations, leads us to reiterate our view that investors should rebalance toward value-oriented stocks. Within the value space, we believe companies with strong and improving fundamentals, attractive valuations and business momentum will prove to be solid investment opportunities and lead to better investment outcomes for our clients. We think our consistent and repeatable investment process is well suited to identify these types of opportunities. 

China-based startup DeepSeek took the markets by storm recently, igniting a broad sell-off in US technology stocks with the launch of DeepSeek-R1, the most recent iteration of its generative artificial-intelligence (AI) model. The R1 model has quickly risen in popularity, propelling to the top of the US Apple App Store’s free applications, where it surpassed competitors like OpenAI’s ChatGPT.

DeepSeek has attracted significant attention for its cost-effective and innovative AI approach. This has prompted swirling concerns that the Chinese AI company was able to achieve its efficiencies and high-performance results using less advanced hardware, potentially circumventing US export controls on high-end AI chips.

DeepSeek’s success challenges the prevailing notion that larger models and more computational resources are essential for AI advancement. Ultimately, if DeepSeek’s claims are true and large language models (LLMs) can be trained with fewer AI chips at a fraction of the cost of competitors’ models, there are a myriad of investment implications to consider. Investors fear this could reduce demand for advanced AI chips, as well as for large-scale data centres and extensive power production to support models. While we believe that lower development costs could pose challenges for hardware and semiconductor companies in the medium term, we see greater development and growth opportunities for hyperscalers, software companies and AI consumers beyond the technology sector. 

The geopolitical race for innovation

DeepSeek’s AI chatbot was released as an open-source model, meaning its source code is publicly available, so users can customise and distribute it as they see fit, subject to the open-source license. The Chinese startup claims to have trained the chatbot for under $6 million, substantially less than US tech giants have spent on similar models. DeepSeek also claims that it used far fewer and lower-grade chips than its American competitors, thereby building a product that rivals counterparts despite US efforts to restrict exports of semiconductor manufacturing equipment to China.

The DeepSeek story highlights the massive geopolitical race at play for AI dominance and the intensifying competition between the West and China. Should global markets be worried about China’s next big move? China has seemingly demonstrated that when companies release groundbreaking LLMs, it can produce cheaper, albeit slightly less performant, versions. If powerful AI models can be built without the most advanced hardware, high-end chip producers could take a hit.

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. For instance, OpenAI has since unveiled new innovations that demonstrate fresh capabilities in driving leading-edge research efforts. Based on past technology cycles, recent news coverage highlights how the theme should continue to evolve at a rapid rate. Investors should anticipate that these advancements may usher in lower prices that could spark the elasticity required to drive new applications and the next wave of growth. 

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China.

Intense competition for model development

While DeepSeek’s ultimate cost structure remains in question, we expect the competitive environment for models to remain intense. We believe this competition should foster lower pricing and drive elasticity, creating new markets that support further long-term growth in the theme.   

Despite the prospects for lower cost models and rapid price declines, earnings results continue to highlight rising capital expenditures (capex) from hyperscalers in 2025. We continue to see rapid innovation and expect more companies to move workloads into the cloud to leverage these advancements. 

But what does this ultimately mean for data-centre capex, and especially for the energy complex? Based on a comprehensive data-centre tracker built by our research associates, we believe capital spending intentions in the near time are robust, if not improving; several hyperscalers boosted capex in their recent earnings announcements. Some of that rise in capital spending is reportedly for investments in long-lived assets, including land and buildings in new regions, and therefore not indicative of an overbuild in compute capacity. Also, as AI matures, more countries are developing sovereign AI strategies that require new data centres in regions where considerable up-front infrastructure investment boosts capital spending on an interim basis.

A myriad of investment implications

Hyperscalers and software

Based on comments made by two influential US tech companies, we believe it is safe to assume that DeepSeek realised at least some cost advantage in building its model. If this is accurate and the cost of building models drops substantially, we believe that hyperscalers and software companies are likely to benefit.

Lower capital intensity equates to higher returns, and we generally think this dynamic bodes well for hyperscalers. Hence, our view on hyperscalers continues to be positive, though we favour those that are less focused on being vertically integrated. Hyperscalers are driven by compounding growth in data and applications, and we believe lower capital costs support that growth algorithm. Additionally, US hyperscalers could become security gatekeepers, which may reinforce the moat of these large companies as geopolitical forces potentially further ration AI technology between the West and the East.

We also believe these developments may boost certain software companies. We have a positive outlook on infrastructure software providers that deliver tools and applications used in developing AI products. Our view is also favourable on application software and internet companies that may embed AI into their products and services. Edge computing companies may also benefit as lower cost and faster inferencing at the edge becomes more compelling. 

Late last year, prior to DeepSeek’s recent announcement, our research analysts had expressed their bullish take on consumption software, owing to improved comparables and a desire to bet on more AI application development in 2025. Additionally, during research visits in December, our analysts gathered evidence that more companies believed that their AI products were ready to ship. Assuming that DeepSeek’s claims are true, the Jevon’s paradox argument—which suggests that increased efficiency can lead to increased demand—crystalises our positive view of software in 2025; if hardware costs are coming down to train LLMs and to ship them and for the increased adoption of AI products, there should be more AI products shipping in 2025 and 2026.

Hardware and semiconductors

On hardware and semiconductors, we are a bit more guarded as we believe the risk to both sectors has increased over the medium term. 

On the hardware front, we have uncertainty around whether a significant reduction in compute costs would lead to a proportional increase in demand on a shorter-term basis. Lower capital intensity may yield excess compute capacity for a period of time before demand elasticity kicks in.

Beyond technology

AI is a foundational technology capable of reshaping various industries and the economy over time. AI technology has expansive potential beyond traditional chatbots. Tech giants and others are exploring broader AI applications, including autonomous vehicles, robotics and digital twins. We believe that many of the biggest winners from the AI theme are likely to be the companies that apply it in non-technology industries, e.g., in manufacturing, health care and financials. These companies are likely to use declining costs of AI innovation to pull those applications in to propel revenue growth.

Longer term, AI-driven labour automation and the cost advantage for companies adopting AI pose risks to jobs in certain industries, including sales, marketing and administrative functions. In our view, companies that have higher costs in those areas relative to their peers may disproportionately benefit from the adoption of AI, unfortunately at the expense of workers.

We harness our multidimensional research capabilities to help us identify potential winners within and beyond the tech ecosystem, while understanding broader investment implications.

Regulatory and geopolitical policy changes

We are monitoring the regulatory and geopolitical environment for potential policy moves that may shift competitive advantages and prompt changes to fundamentals.

For instance, the construction of data centres in the European Union is driven by stringent regulations aimed at protecting European consumer data. Despite potential shifts in AI models, the core need for secure data storage remains unchanged. This regulatory environment necessitates a proactive approach to monitor and adapt to new policies, ensuring that businesses can navigate these changes effectively.

In US regulatory developments, President Trump issued an executive order in January aiming to reduce regulations and accelerate progress in AI. Trump’s order rescinded former President Biden’s 2023 executive order that sought to tighten regulations on advanced computer chips, potentially restricting shipments of AI chips to certain countries beyond US allies. While we expect the political and regulatory environment to remain dynamic, we expect AI companies to remain under increased scrutiny regarding their compliance with export restrictions and operational transparency.

Cyber risks are also a key consideration, as downloading AI applications can introduce new avenues for cyber attacks. Social risks, including trust and misinformation, are also heightened in this context. As regulatory developments continue to unfold, it is crucial for investors to stay informed and prepared for the evolving challenges and opportunities.

The ever-evolving AI industry

At Newton, we utilise our global multidimensional research capabilities to stay abreast of the latest technology innovations, in China and elsewhere. In the case of DeepSeek, our fundamental research analysts have been assessing the credibility of headlines and the potential impact of news on hardware, software, power generation and power infrastructure investments. Our quantitative team has identified 21 past instances since 1990 when top constituents of the S&P 500 were down 15% or more in one day; they have been examining those instances to assess what the past might reveal about future market performance. Members of our specialist team have consulted with a former director for China economics on the White House National Security Council; they have reviewed media interviews by the hedge fund sponsoring DeepSeek to evaluate the credibility of the claims and assess the geopolitical implications.

DeepSeek’s latest innovation highlights the dynamic and rapidly evolving nature of AI technology. The competitive landscape is intensifying, and as companies continue to innovate and adapt, the potential for lower costs and increased efficiency could drive new applications and growth opportunities across various industries. Investors should remain vigilant and prepared for the ongoing changes likely to shape the future of AI and its impact on the global market.

China-based startup DeepSeek took the markets by storm recently, igniting a broad sell-off in US technology stocks with the launch of DeepSeek-R1, the most recent iteration of its generative artificial-intelligence (AI) model. The R1 model has quickly risen in popularity, propelling to the top of the US Apple App Store’s free applications, where it surpassed competitors like OpenAI’s ChatGPT.

DeepSeek has attracted significant attention for its cost-effective and innovative AI approach. This has prompted swirling concerns that the Chinese AI company was able to achieve its efficiencies and high-performance results using less advanced hardware, potentially circumventing US export controls on high-end AI chips.

DeepSeek’s success challenges the prevailing notion that larger models and more computational resources are essential for AI advancement. Ultimately, if DeepSeek’s claims are true and large language models (LLMs) can be trained with fewer AI chips at a fraction of the cost of competitors’ models, there are a myriad of investment implications to consider. Investors fear this could reduce demand for advanced AI chips, as well as for large-scale data centers and extensive power production to support models. While we believe that lower development costs could pose challenges for hardware and semiconductor companies in the medium term, we see greater development and growth opportunities for hyperscalers, software companies and AI consumers beyond the technology sector. 

The Geopolitical Race for Innovation

DeepSeek’s AI chatbot was released as an open-source model, meaning its source code is publicly available, so users can customize and distribute it as they see fit, subject to the open-source license. The Chinese startup claims to have trained the chatbot for under $6 million, substantially less than US tech giants have spent on similar models. DeepSeek also claims that it used far fewer and lower-grade chips than its American competitors, thereby building a product that rivals counterparts despite US efforts to restrict exports of semiconductor manufacturing equipment to China.

The DeepSeek story highlights the massive geopolitical race at play for AI dominance and the intensifying competition between the West and China. Should global markets be worried about China’s next big move? China has seemingly demonstrated that when companies release groundbreaking LLMs, it can produce cheaper, albeit slightly less performant, versions. If powerful AI models can be built without the most advanced hardware, high-end chip producers could take a hit.

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. For instance, OpenAI has since unveiled new innovations that demonstrate fresh capabilities in driving leading-edge research efforts. Based on past technology cycles, recent news coverage highlights how the theme should continue to evolve at a rapid rate. Investors should anticipate that these advancements may usher in lower prices that could spark the elasticity required to drive new applications and the next wave of growth. 

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. 

Intense Competition for Model Development

While DeepSeek’s ultimate cost structure remains in question, we expect the competitive environment for models to remain intense. We believe this competition should foster lower pricing and drive elasticity, creating new markets that support further long-term growth in the theme.   

Despite the prospects for lower cost models and rapid price declines, earnings results continue to highlight rising capital expenditures (capex) from hyperscalers in 2025. We continue to see rapid innovation and expect more companies to move workloads into the cloud to leverage these advancements. 

But what does this ultimately mean for data-center capex, and especially for the energy complex? Based on a comprehensive data-center tracker built by our research associates, we believe capital spending intentions in the near time are robust, if not improving; several hyperscalers boosted capex in their recent earnings announcements. Some of that rise in capital spending is reportedly for investments in long-lived assets, including land and buildings in new regions, and therefore not indicative of an overbuild in compute capacity. Also, as AI matures, more countries are developing sovereign AI strategies that require new data centers in regions where considerable up-front infrastructure investment boosts capital spending on an interim basis.

A Myriad of Investment Implications

Hyperscalers and Software

Based on comments made by two influential US tech companies, we believe it is safe to assume that DeepSeek realized at least some cost advantage in building its model. If this is accurate and the cost of building models drops substantially, we believe that hyperscalers and software companies are likely to benefit.

Lower capital intensity equates to higher returns, and we generally think this dynamic bodes well for hyperscalers. Hence, our view on hyperscalers continues to be positive, though we favor those that are less focused on being vertically integrated. Hyperscalers are driven by compounding growth in data and applications, and we believe lower capital costs support that growth algorithm. Additionally, US hyperscalers could become security gatekeepers, which may reinforce the moat of these large companies as geopolitical forces potentially further ration AI technology between the West and the East.

We also believe these developments may boost certain software companies. We have a positive outlook on infrastructure software providers that deliver tools and applications used in developing AI products. Our view is also favorable on application software and internet companies that may embed AI into their products and services. Edge computing companies may also benefit as lower cost and faster inferencing at the edge becomes more compelling. 

Late last year, prior to DeepSeek’s recent announcement, our research analysts had expressed their bullish take on consumption software, owing to improved comparables and a desire to bet on more AI application development in 2025. Additionally, during research visits in December, our analysts gathered evidence that more companies believed that their AI products were ready to ship. Assuming that DeepSeek’s claims are true, the Jevon’s paradox argument—which suggests that increased efficiency can lead to increased demand—crystalizes our positive view of software in 2025; if hardware costs are coming down to train LLMs and to ship them and for the increased adoption of AI products, there should be more AI products shipping in 2025 and 2026.

Hardware and Semiconductors

On hardware and semiconductors, we are a bit more guarded as we believe the risk to both sectors has increased over the medium term. 

On the hardware front, we have uncertainty around whether a significant reduction in compute costs would lead to a proportional increase in demand on a shorter-term basis. Lower capital intensity may yield excess compute capacity for a period of time before demand elasticity kicks in.

Beyond Technology

AI is a foundational technology capable of reshaping various industries and the economy over time. AI technology has expansive potential beyond traditional chatbots. Tech giants and others are exploring broader AI applications, including autonomous vehicles, robotics and digital twins. We believe that many of the biggest winners from the AI theme are likely to be the companies that apply it in non-technology industries, e.g., in manufacturing, health care and financials. These companies are likely to use declining costs of AI innovation to pull those applications in to propel revenue growth.

Longer term, AI-driven labor automation and the cost advantage for companies adopting AI pose risks to jobs in certain industries, including sales, marketing and administrative functions. In our view, companies that have higher costs in those areas relative to their peers may disproportionately benefit from the adoption of AI, unfortunately at the expense of workers.

We harness our multidimensional research capabilities to help us identify potential winners within and beyond the tech ecosystem, while understanding broader investment implications.

Regulatory and Geopolitical Policy Changes

We are monitoring the regulatory and geopolitical environment for potential policy moves that may shift competitive advantages and prompt changes to fundamentals.

For instance, the construction of data centers in the European Union is driven by stringent regulations aimed at protecting European consumer data. Despite potential shifts in AI models, the core need for secure data storage remains unchanged. This regulatory environment necessitates a proactive approach to monitor and adapt to new policies, ensuring that businesses can navigate these changes effectively.

In US regulatory developments, President Trump issued an executive order in January aiming to reduce regulations and accelerate progress in AI. Trump’s order rescinded former President Biden’s 2023 executive order that sought to tighten regulations on advanced computer chips, potentially restricting shipments of AI chips to certain countries beyond US allies. While we expect the political and regulatory environment to remain dynamic, we expect AI companies to remain under increased scrutiny regarding their compliance with export restrictions and operational transparency.

Cyber risks are also a key consideration, as downloading AI applications can introduce new avenues for cyber attacks. Social risks, including trust and misinformation, are also heightened in this context. As regulatory developments continue to unfold, it is crucial for investors to stay informed and prepared for the evolving challenges and opportunities.

The Ever-Evolving AI Industry

At Newton, we utilize our global multidimensional research capabilities to stay abreast of the latest technology innovations, in China and elsewhere. In the case of DeepSeek, our fundamental research analysts have been assessing the credibility of headlines and the potential impact of news on hardware, software, power generation and power infrastructure investments. Our quantitative team has identified 21 past instances since 1990 when top constituents of the S&P 500 were down 15% or more in one day; they have been examining those instances to assess what the past might reveal about future market performance. Members of our specialist team have consulted with a former director for China economics on the White House National Security Council; they have reviewed media interviews by the hedge fund sponsoring DeepSeek to evaluate the credibility of the claims and assess the geopolitical implications.

DeepSeek’s latest innovation highlights the dynamic and rapidly evolving nature of AI technology. The competitive landscape is intensifying, and as companies continue to innovate and adapt, the potential for lower costs and increased efficiency could drive new applications and growth opportunities across various industries. Investors should remain vigilant and prepared for the ongoing changes likely to shape the future of AI and its impact on the global market.

The rapid advancements in technology, along with increasing consumer demand for sustainable and efficient transportation solutions, underpin the strong outlook for mobility investment. Innovations in connectivity, autonomous and assisted driving, electrification and smart infrastructure are transforming the mobility landscape, creating significant opportunities for growth and profitability. Furthermore, government initiatives and regulations aimed at reducing carbon emissions are accelerating the adoption of new mobility technologies. As cities around the world evolve into smart, connected hubs, the companies leading in mobility innovation are well-positioned to capitalize on this paradigm shift, making it a compelling theme for forward-looking investors.

Connectivity: Paving the Way for Mobility

Transportation is undergoing a transformative phase, with connectivity driving future advancements. Vehicles are increasingly becoming software-defined, leading to the consolidation of domain controllers and the integration of infotainment, display and connectivity solutions. Portfolio companies are at the forefront of these efforts, enhancing the overall driving experience.

For example, a leading player in wireless connectivity, including cellular, Wi-Fi, Bluetooth and GPS, is collaborating with a major online retailer to democratize vehicle software development. This partnership allows automakers to experiment with cloud technologies, making vehicles more intelligent, adaptable and safe. Artificial intelligence (AI) and machine learning services are being integrated into automotive solutions, highlighting the potential for intelligent, responsive vehicles. The company’s digital chassis exemplifies connectivity innovation, contributing to a $45 billion automotive pipeline. This innovation demonstrates the potential for intelligent and responsive vehicles, improving safety and convenience for drivers and passengers.

As vehicles evolve, the demand for frequent over-the-air (OTA) updates should grow, ensuring they remain equipped with the latest innovations. This connectivity can facilitate continuous enhancements and maintenance without the annoyance of in-person interventions. Additionally, AI digital assistants are expected to offer customized services, enhancing the driving experience and improving safety for occupants.

Original equipment manufacturers (OEMs) are expected to leverage connectivity to deliver advanced features seamlessly. Additionally, the adoption of digital twins—digital replicas of physical vehicles—could drive demand for enhanced connectivity. These digital models will monitor vehicle performance in real time, comparing actual data to the model, reducing accidents and extending vehicle lifespan by addressing potential repairs proactively.

Connectivity is central to these advancements, enhancing the driving experience and ensuring vehicle longevity. We believe the automotive industry is on the cusp of a new era, where connectivity transforms vehicles into smarter, safer and more adaptable modes of transportation.

Autonomous/Assisted Driving

We believe advanced driver assistance systems (ADAS) will continue to grow, with partial automation (L2) and eyes on/hands off (L2+) adoption rising, while basic driver assistance (L1) is already standard in developed markets and China. Auto OEMs need these technologies to stay competitive. The uptake of highly automated driving (L3) is slow due to cost and speed limitations, but L2 and L2+ meet most convenience and safety needs for buyers. In 2025, passenger vehicles are likely to focus on testing and data gathering for full self-driving (L4), with obstacles like public trust and regulatory approval. While pilot self-driving taxi services are expanding in the US and China, the latter is closer to commercialization due to better governmental support. Revenue from ADAS may surge to $307 billion by 2035. Emerging markets will see significant L1 growth, though L2 and L2+ remain limited to premium vehicles. ADAS and self-driving systems are also being adopted in commercial, agricultural, construction and railway vehicles.

Sharing

Continuing from 2023, driver supply improved in 2024, allowing rideshare companies to shift incentives from drivers to consumers. With Covid-related challenges resolved, companies focused on driving bookings growth and long-term adoption through attractive pricing. Now, market share has shifted towards a major player due to improved driver supply, enabling a premium pricing strategy, while its competitor focuses on cost competitiveness. Insurance headwinds are easing, and renewal costs are trending downwards.

In Europe, regulatory clarity around driver status remains country specific. Companies with larger geographical reach benefit from investing margins from established markets into growth areas. Emerging markets see increased competition, but rationalized incentive spending and advertising integration have aided profitability. Chinese government stimulus is expected to boost consumer spending and travel, benefiting internet platforms.

Looking to 2025, the ridesharing industry faces changes with the push towards autonomous vehicles (AVs). One leading AV company aims to deploy robotaxis in select US states within a year, pending regulatory approval. Partnerships between rideshare and AV companies are increasing, with AV impact likely concentrated in the US due to operational challenges in dynamic road environments. AV deployments will focus on organized, grid-based infrastructure layouts.

Electrification

Electrification-related equities are expected to benefit in 2025 from electric-vehicle (EV) growth and investments in infrastructure such as grid enhancements, power generation and charging networks. Lower battery-pack costs are reducing vehicle prices, enhancing affordability.

EV volume growth varies by region, with China leading, while the US and Europe grow at different rates due to local policies and incentives. Multi-powertrain strategies are common outside China, where battery-powered electric vehicle (BEVs) and plug-in hybrid-electric vehicles (PHEVs) lead. Geopolitical factors are influencing the auto industry, with new tariffs on Chinese-made vehicles in the US and European Union to protect local workforces, and potential retaliatory actions from China.

Affordability and charging infrastructure are adoption hurdles for BEVs in the US and Europe, but more low-priced models and expanding networks should help. Europe could see significant BEV growth due to stricter CO2 regulations. Emerging markets like India and Indonesia face affordability and infrastructure issues, which may be addressed over time.

Governments play a crucial role in promoting EV adoption through policies and incentives. The electrification of commercial fleets presents significant opportunities for reducing emissions. Companies recognize the benefits of transitioning to electric fleets, driving further adoption of electrification technologies.

Mobility Benefits from AI-driven Tailwinds

AI drives the mobility sector by advancing connected and autonomous vehicles, predictive maintenance and enhancing safety features. Data centers, crucial for AI infrastructure, demand significant energy, leading to increased energy infrastructure with new power plants, grid enhancements and renewable energy integration. The rise in data-center energy needs prompts innovation in cooling technologies, data transmission and cybersecurity.

Energy demands from AI and mobility innovation are intertwined. Developments in battery and cooling technologies, charging infrastructure and power generation benefit both sectors. AI’s energy requirements foster advancements that directly support EV development, making mobility and AI growth interconnected. This synergy creates a promising future for mobility innovation, capitalizing on AI-driven energy advancements.

Semiconductors: The Tie that Binds

Semiconductors are the key component across all CASE categories, but especially crucial for EVs, enhancing power management, battery efficiency and overall performance. As EV adoption rises due to strict emissions regulations and government incentives in the US, Europe and China, the demand for high-performance semiconductors is expected to grow significantly.

ADAS and autonomous driving capabilities also rely heavily on sophisticated semiconductor solutions. These technologies need sensors, microprocessors and communication modules, all dependent on cutting-edge chips. The evolution of smart mobility, including connected and automated vehicles, highlights the importance of robust semiconductor infrastructure.

However, the US-China tariffs pose a challenge to the semiconductor supply chain. While driving up costs and potentially slowing innovation, these tariffs might also stimulate domestic production and innovation within the US and other regions, leading to a more resilient global industry. Balancing the short-term challenges and long-term opportunities presented by these tariffs is essential for the continued advancement of semiconductors in the EV sector and beyond. This dynamic is factored into our stock selection process, favoring semiconductor manufacturers with diversified fabrication capabilities.

Impact of the US Election and the Republican Sweep

With a new incoming US administration and Republicans in full control of Washington, investors are unsure of the longer-term impact to energy transition and zero-emission vehicles. However, it is worth remembering that while some of Donald Trump’s earlier administration’s policies were perceived as potentially hindering environmental progress, his administration’s overarching goal of fostering American technological innovation provided a supportive backdrop for the growth of the EV industry. Tax incentives for research and development, infrastructure investments and support for domestic manufacturing all contributed to creating an environment where EV technologies could thrive. Despite the complexities and contradictions of Trump’s policy agenda, the alignment between his desire for American technological leadership and the innovative nature of the EV industry suggests that EV adoption could continue to grow, even within the framework of his broader policy agenda. Overall, the future of EV adoption in the US appears attractive, driven by the continuous push for innovation and the undeniable shift toward more sustainable transportation solutions.

Gearing Up for the Future

We remain focused as we seek to capitalize on these myriad opportunities, investing in companies across the CASE landscape and the many sub-themes within them, which we expect to provide tailwinds to accelerating company growth. Our focus is on the companies that are leading producers or beneficiaries of technological innovations that may have profound significance on the mobility eco-system. As such, our universe of stocks continues to grow, from 175 in 2018 to over 400 today. Importantly, private companies continue to grow in the mobility ecosystem. StartUs insights estimates that there are over 3,300 startups and scaleups within mobility across many sub-themes, including autonomy, internet of things, mobility as a service, micromobility, AI and smart infrastructure. Identifying new opportunities and emerging technologies early can significantly boost a company’s competitive advantage and is critical for investors. Given our dynamic research platform that includes specialty research areas of investigative and private markets research, it positions us well as we seek to capitalize on both the existing and newer entrants to the mobility ecosystem.     

2024 has been characterized by pronounced volatility, affecting everything from interest-rate fluctuations and inflation expectations to the economic implications of artificial intelligence and shifting political landscapes. Heading into 2025, much of this uncertainty is likely to persist. With inflation remaining above pre-pandemic levels and geopolitical tensions continuing, the market faces continued dislocation. Amid these challenges, we remain steadfast in our balanced, risk-adjusted and dividend-focused approach, which is designed to deliver stability and competitive returns in volatile environments.

Inflation Unfolding

From a global perspective, the current environment is characterized by disinflationary growth, with inflation rates decreasing from the peak levels of 2022. However, there are concerns that inflation could pick up again in 2025, primarily due to President-elect Trump’s anticipated tariffs and their impact on the prices of goods and services. We anticipate that inflation should remain above consensus expectations, gradually rising from mid-2025 and ending the year between 2.5% and 3%.

The Second Act: A Stage Set for Uncertainty

Trump’s second term introduces additional ambiguity surrounding the future of interest-rate adjustments. While Jerome Powell remains Federal Reserve (Fed) Chair until 2026, Trump’s proposed policies could complicate interest-rate positioning for the central bank. We believe the Fed will largely overlook the increase in inflation, particularly if there is no substantial response from wages, indicating no second-round effects.

The market has already begun pricing in fewer interest-rate cuts as pro-growth policies could slow the rate-cutting process. We foresee the Fed’s cutting cycle in 2025 to be shallow and potentially paused early, with the federal funds rate likely settling around 3.75-4% by year end, aligning with current market pricing. We expect 10-year yields to trade near 4.5%, above the consensus forecast of 4.1%.

The risks to inflation and yields hinge on economic growth trends. If disinflationary growth deteriorates into deflation, we could see commodity prices fall, especially oil, which would likely push yields lower. Conversely, if the Trump administration pressures the Fed for aggressive easing and increases fiscal spending, bond markets may react negatively, causing yield-curve steepening and market volatility. Both scenarios are plausible in 2025.¹

Heading into the coming year, we remain vigilant, understanding that continued volatility could lead to periods of heightened uncertainty, as well as opportunities for well-positioned investment strategies. We acknowledge the higher probability that inflation could persist, but we are prepared to manage these risks through our portfolio construction and broad risk controls.

As inflationary pressures and market volatility are expected to persist into 2025, a dividend-focused approach may prove even more valuable. In our view, dividends offer an essential hedge against inflation and provide a more reliable income stream, marking them as a key component of our strategy in uncertain times.

The Changing Appeal of Dividend Yield

The demand of dividend-paying stocks is influenced by broad market investor sentiment. For much of 2024, dividend-paying stocks underperformed as investors favored high-growth companies. The shift from risk-on to risk-off and back to risk-on exemplifies the market’s current uncertainty.

As demonstrated in the chart below, the preference for dividend yield tends to undergo fluctuations over time. During phases when dividend-paying stocks lose their appeal, often due to a heightened focus on growth stocks, carefully designed risk controls can help investors adeptly navigate the shifting market sentiments, ensuring that portfolios remain resilient and well-positioned for long-term success

Shifting Investor Preference between Growth and Dividend Yield: MSCI Relative Returns

(December 31, 2014 – September 30, 2024)

Source: MSCI, as of September 30, 2024.

Why Dividends Are Set to Shine  

The opportunity set within the S&P 500^® has grown as more high-growth sectors, particularly information technology, health care and industrials, have seen an increased adoption of dividend payments. As of September 2024, around 80% of S&P 500 companies pay dividends, with 24% of those in the technology sector, up from 13% a decade ago. This shift highlights that growth and income can go hand in hand.²

Dividend-focused investing is particularly compelling in today’s market. Companies that pay and grow dividends tend to be more resilient in downturns as investors seek stability in uncertain times. These companies also have the ability to increase payouts in line with or above inflation, making them an appealing choice for income-focused investors. In a low interest-rate environment, where bond yields are less attractive, dividend paying stocks become even more compelling. With inflation remaining above pre-pandemic levels and potentially moving higher, these stocks are an effective hedge, further enhancing their appeal. Dividends remain a powerful tool for mitigating volatility, providing steady income and serving as a hedge against inflation.

Equities hold a unique advantage in their ability to adjust for inflation, unlike bond yields which remain static. Despite the current dividend yield standing at approximately 2.1%, and bond yields at around 4.2%, the S&P 500 has returned 28.1% year to date (through November 30, 2024), far surpassing the bond yield. This stark difference underscores the potential of equities not only to keep pace with inflation but also to significantly outstrip it, thereby preserving and enhancing the investor’s buying power. In contrast, bond holders may see their purchasing power eroded in an inflationary environment, making dividend-paying equities an even more compelling choice for those seeking both income and growth.

Looking Ahead to 2025

As we look to the year ahead, we continue to see the potential for volatility, with rising inflationary pressures, geopolitical risks and monetary policy as key factors shaping market dynamics. The ever-shifting developments surrounding these factors could drive uncertainty, but they may also create opportunities for investors focused on high-quality companies with reliable dividends. We remain committed to identifying these companies, maintaining a disciplined, dividend-focused approach as we traverse the uncertainty that lies ahead. As the market continues to evolve, we will remain focused on delivering steady income and growth potential, ensuring we are prepared for what the year ahead may bring.

¹ Source: BNY Advisors Investment Institute.

² https://www.ftinstitutionalemea.com/articles/2024/equity/four-reasons-dividends-matter-now

Matt Webb, head of cyber clients and strategy at Howden Re, joins Double Take to discuss the evolution and current state of cyber insurance, focusing on the impacts of ransomware, reputational harm and business interruption.

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