Fidelity: Fidelity Answers: If I'm worried about US tech then where else can I make decent returns?

We often talk in the financial industry about the importance of bottom-up investing, of stock-picking. And it can sound like a thin idea: of course it’s important to pick the right companies, tell us something we didn’t know… However, there is a harder intellectual argument that right now feels very relevant. 

Europe portfolio manager Fred Sykes says it is simply a mistake to assume that with economic growth come profits. In reality, he says, GDP is poorly correlated with stock market returns. 

“It's not actually GDP growth that drives corporate profits,” he says. “It's the intersection of demand and supply that does. That sometimes surprises people when they come to it for the first time. But actually, on reflection, it makes a lot of sense to me. 

“You need an area of the market or of the economy where demand and supply are at least in balance to preserve profitability. If demand in that environment starts running ahead of supply, profits will increase. But conversely, you could have a very, very good demand environment where if supply is uncapped, there'll be zero profit creation and therefore zero returns for shareholders.”

Analyst Srishti Sinha, for example, is watching the power companies that are building capacity to supply the construction of AI data centres. What keeps her up at night is wondering what happens when the music stops. 

Whether one believes the AI boom has more legs or is a bubble ready to pop, many of the companies benefitting are locked into the same investment. The current demand for chips, computing power, or actual power is clear, and companies in each of those sectors have flocked to invest and provide for it. But they are all doing so together, at huge scale; what happens if demand drops off? 

“The last time you saw something like this would probably be the tech bubble in 2000, when there was a massive gas buildout, which did turn out to be a bubble,” Sinha says. “A lot of the people running the gas turbine companies lived through that cycle. So they're hesitant to expand capacity. 

“I do think about how [many] data centres we actually need: if there is no return on investment and the AI models stop getting better, then it's unclear if we'll need the full 50 to 60 gigawatts that's currently baked in out to 2030.”

Ride the waves

Rather than macroeconomics, Sykes has learnt to look closely at the quality of management running companies. If the way companies supply their goods, services, or products is driven by ideas, or execution, that others don’t have, then there’s more chance that team delivers in the longer run. Demand will come and go. But those ideas, processes, and positioning will hold up the company and the returns it provides to its owners.

Fellow portfolio manager Tom Record agrees about supply but has a different take on the AI boom. No matter whether it’s a boom or a bubble, he says, you probably want to be on board. 

“If it is in the early stage of a bubble, you probably want to be invested. But you want to make sure that you're not only invested in those [growth] stocks because there will come a time when the cyclicality of it will take hold. 

“This may be a structural growth story, and if so there will be waves to it, which we should exploit. It is still a bit like a science experiment where you have that activation energy needed to get to the scale where it works, but you've got to get over that hump. Then you can start making lots of money.”

Tom deliberately blends value, quality, and growth investment styles in search of consistent returns, and 2025 has been a good example of that strategy paying off. At the start of the year, value investment was delivering for many. Then Liberation Day blew up markets and ‘quality’ stocks outperformed, before the resulting clear-out of valuations left the road open to the growth market we have seen since. 

Now he’s looking at other plays. He thinks the concern over the healthcare sector of the past couple of years, and the resulting dip in valuations, has created strong opportunities. And in China, tech companies are back in favour with authorities after a difficult period of tightening regulation.  

“We're now in that phase where those companies are again being promoted and being allowed to grow, being allowed to innovate, and allowed to build stronger competitive advantages,” he says. “That is really exciting because these are genuinely innovative companies with scale, with the ability to grow.”

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