Key takeaways:
- Sovereignty reflects the growing focus on securing critical industries, infrastructure, and supply chains in an increasingly fragmented world.
- The rise of sovereignty as an investment theme is creating opportunities for companies that enable customers to enhance supply chain resilience, regionalise production and navigate an increasingly complex geopolitical environment.
- While considerations around regional leadership, economic cycles, and geopolitical developments are important, a thematic global equity approach focusing on the longer-term themes reshaping industries and economies can offer a new wave of opportunity.
Investors face an increasingly complex set of asset allocation decisions. Debates over US exceptionalism, Europe’s revival, China’s outlook, interest rates, and geopolitical uncertainty have made it harder to determine where to invest and when. At the same time, many traditional global equity strategies have struggled to consistently identify the small group of companies responsible for driving a significant share of long-term market returns. Some narrowly-focused thematic funds have disappointed, with highly correlated stocks that can suffer from stretched valuations and significant drawdowns when the market turns and tend to be heavily influenced by factor (e.g. valuation, market cap, quality), style (growth versus value), and market cycles.
We think a different approach is needed. One that looks beyond regional allocation decisions and instead focuses on the structural themes reshaping the global economy, such as smarter automation, mobility, lifestyle evolution, longevity, biotechnology, net zero innovation, and sovereignty. With diversification and consideration of factor, style and sector risks embedded within its core, this approach focuses on exposure to businesses that stand to benefit regardless of geography and have the strongest potential for future returns.
Among these themes, sovereignty is becoming increasingly important as geopolitical shifts reshape the investment landscape.
Sovereignty: A defining investment theme of a more fragmented world
Sovereignty reflects a growing focus by governments and corporates on securing control over critical industries and inputs. In practical terms this means a shift away from globalisation to localisation. Supply chains are being redesigned, and strategic infrastructure is being procured and controlled to reduce dependency on specific countries and/or suppliers. This includes the safeguarding of data and technological innovations, communication networks, energy systems, critical minerals, and in particular, semiconductors and other AI infrastructure. Consequently, a more fragmented and diverse global investment environment has emerged.
Tariff policies, export controls, and restrictions on advanced technologies have demonstrated how quickly the economics of supply chains can change. At the same time, energy market disruptions have highlighted the vulnerability of global supply networks to geopolitical events and physical chokepoints. Together, these developments are encouraging businesses to prioritise resilience and certainty alongside cost efficiency.
What does sovereignty mean for investors?
Sovereign (government) customers are now an increasingly growing customer base in the AI era with their often-outsized capital expenditure plans, procurement decisions, and national spending priorities, with the US, China, and the Middle East being at the forefront.
AI is the new arms race – AI capability is now being viewed as a priority for countries and regions, being strategic to national security, cybersecurity and economic productivity. Unlike in the internet era, we are seeing countries becoming meaningful customers in AI infrastructure as they build their own data centres. This has wider implications for supply chains, costs, competition, trade, regulation, and sustainability.
This creates a broad range of investment opportunities. Companies that enable more resilient supply chains, support critical infrastructure, provide trusted technology solutions, or help countries build domestic capabilities may benefit from sustained demand over many years.
At the same time, investors need to analyse companies through an increasingly complex lens. Traditional financial metrics remain important, but political developments, regulatory changes, national security considerations, and shifts in government spending priorities are becoming more influential. Understanding these dynamics may be critical in separating future winners from losers.
Flexing across the sovereignty AI value chain
One company illustrating the growing investment opportunities arising from the emphasis on resilience, capacity, and strategic infrastructure is Flex.
While much attention within AI focuses on semiconductor manufacturers and software developers, the buildout of AI infrastructure depends on a vast physical ecosystem. Data centres require reliable power delivery, advanced cooling systems, integrated computing architectures, and the ability to deploy capacity at scale.
Flex sits in that essential layer, designing and manufacturing the racks, power systems, cooling solutions, and compute integrations that data centres rely on. The business provides systems-level capability in the more challenging areas of the AI stack. In terms of power supply, next generation data centres are moving toward higher density architectures that require more efficient, scalable delivery. In cooling systems, the shift from air toward liquid is gathering pace as rack densities rise. A key differentiator for Flex is that it approaches power, cooling, and compute integration as one engineered system rather than standalone components. Its rack-level integrated solutions help customers deploy compute capacity faster, and with fewer integration points.
Flex’s CEO has talked about customer conversations starting with a map of their factories, prioritising supply-chain resilience rather than focusing on price – there is a new willingness for customers to pay for the greater complexity and security of regionalised supply chains required today.
Look beyond allocation debates for a new wave of opportunity
Investors today are faced with three key challenges:
- Uncertainty around regional allocations
- Increasing index concentration
- Difficulty of accessing structural growth themes without taking excessive thematic risk
Markets will continue to grapple with questions around regional leadership, economic cycles, and geopolitical developments. While these considerations are important, a thematic global equity approach that focuses on the longer-term themes reshaping industries and economies can offer a new wave of opportunity.
Sovereignty is one such theme that we think fits this approach. As governments, corporations, and consumers place greater value on resilience, security, and control over critical infrastructure, we believe the companies helping to enable that transition are well positioned to become the defining winners of the next decade.
IMPORTANT INFORMATION
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
There is no guarantee that past trends will continue, or forecasts will be realised. The views are subject to change without notice.
AI infrastructure: Refers to data centres, chips, power systems, cooling equipment and networking technology that enable AI models to operate at scale. As AI adoption grows, demand for AI infrastructure will only increase.
Drawdown: A fall in the value of an investment from its previous high point to its subsequent low point, e.g. if investor sentiment changes or markets weaken.
Geopolitics: Refers to countries competing, cooperating, and making decisions based on factors such as power, geography, resources, trade, technology, and national security. Examples include trade tariffs, export restrictions, sanctions and reshoring.
Higher rack density: As AI systems become more powerful, data centres are packing more computing capability into each server rack, enabling more computing power from the same amount of physical space.
Index concentration risk: Occurs when a growing share of index returns is driven by a small number of companies. This can increase exposure to company-specific risks and reduce the diversification benefits investors may expect from a broad market index.
Market cap: The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size and is often abbreviated to ‘market cap’.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
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- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
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