Market Call: David Driscoll's outlook on Global Equities

Key Concepts

Market Rotation: Shift from growth (Magnificent Seven, AI) to value-oriented stocks.
Return on Invested Capital (ROIC): A key metric for evaluating investment opportunities, emphasizing long-term value over chasing short-term gains.
Diversification: Spreading investments across different asset classes, geographies, and sectors to mitigate risk.
Currency Impact: The influence of exchange rates on investment returns, particularly for international investments.
AI Disruption: The potential impact of Artificial Intelligence on various sectors, particularly software and healthcare.
Diminishing Returns: The principle that the marginal benefit of an investment decreases as the investment increases.
Small Cap Momentum: The potential for outperformance of small-cap stocks in a low-interest rate environment.
Emerging Markets: The potential for higher growth and returns in developing economies.

Global Equity Market Outlook & Investment Strategies (Market Call - David Driscoll)

This discussion with David Driscoll, President & CEO of Liberty International Investment Management, focuses on the current state of global equity markets and strategic investment approaches for 2026. The conversation highlights a shift away from the momentum-driven market of the past three years towards a more diversified, value-oriented approach.

1. Market Performance & Diversification (Early 2026)

Driscoll observes a diversification trend in early 2026, following a three-year period dominated by the “Magnificent Seven” (large tech stocks), AI, and gold. He notes the following year-to-date (YTD) performance as of the recording date:

Russell 2000 (Small Cap): +8%
S&P 500: +1%
Japan: +7%
Emerging Markets: +6%
Canada: +4%
Europe: +2%
Global Developed Market: +1.5%
NASDAQ & S&P: +1%

This data indicates a move away from previously high-performing sectors towards broader market participation, with small-cap stocks and international markets showing stronger gains. He emphasizes the importance of investing in “what’s cheap” and provides “good long-term valuation.”

2. Investment Philosophy: Return on Invested Capital (ROIC) & Avoiding Emotional Investing

Driscoll strongly advocates for focusing on Return on Invested Capital (ROIC), a principle championed by Warren Buffett. He warns against chasing returns and emphasizes the importance of building a portfolio designed to withstand both positive and negative market conditions. He illustrates this point with gold, noting a 98% gain in a subindex but only a 1% return over 20 years, highlighting the law of diminishing returns. The goal is to “stay in the game” even during significant market downturns (30-40% declines).

3. International Diversification: The Case for Global Exposure

Driscoll stresses the logical necessity of diversifying beyond North America, pointing out that North America represents only 550 million people out of a global population of 8 billion. He also notes the weakening of both the Canadian and US dollar against a basket of global currencies in the previous year, benefiting international investors. He explains that international investments can provide a “total return” boost when a home currency appreciates (e.g., a 10% stock return plus a 5-10% currency gain). Conversely, a weakening home currency can diminish US stock returns (e.g., a 10% stock return minus a 7% currency loss).

4. Sector-Specific Analysis & Company Reviews

The discussion includes detailed reviews of several companies:

Motorola Solutions: A generally positive outlook, with strong performance in software management, video, and government contracts (911 communication). The primary concern is the potential impact of AI on software pricing power.
OpenText: A cautionary view due to challenges in the software sector. AI is reducing pricing power, leading to lower valuations (from 40x free cash flow to 16-18x). Driscoll suggests a “wait and see” approach or potentially selling the stock. He exited his software positions last summer.
Union Pacific (UNP): A neutral outlook. Performance is tied to the US economy and agricultural, automotive, and chemical shipments. Patience is required, as the stock is currently trading sideways.
Roper Technologies: Facing similar software challenges as OpenText, but with a diversified business. A good long-term investment, but the stock has recently declined.
GE Aerospace: Experienced a strong run but has recently dipped. Driven by commercial aircraft growth and increased defense spending. Driscoll recommends holding the stock and focusing on long-term trends.
Netflix: Facing challenges with subscriber growth and competition. Needs to expand into live events and sports to maintain momentum. Driscoll suggests waiting for further indications of sustainable earnings growth before buying.
Saputo: A food company facing headwinds from changing consumer preferences (shift away from processed foods). Driscoll suggests considering selling half of the position if the investor has doubled their money.
Keyence Corporation (Japan): A positive outlook due to increasing demand for factory automation technology. Benefiting from the rise of robotics and assembly lines.
UnitedHealth: Facing regulatory scrutiny and challenges to pricing power. Driscoll avoids the healthcare sector currently.

5. Emerging Market Opportunities

Driscoll highlights the potential of emerging markets, which outperformed the S&P 500 in the previous year (up nearly 30%). He points to the demographic advantages of countries like India (a young population) and the potential for currency appreciation (e.g., Brazilian Real, Mexican Peso) as key drivers. He recommends considering ETFs focused on emerging markets.

6. Top Picks for 2026 (as of the recording date)

StanTech Inc: Architectural firm benefiting from environmental remediation and infrastructure upgrades.
Littelfuse Inc: Manufacturer of fuses and sensors, poised to benefit from increased demand in data centers and electrification.
Keyence Corporation: Japanese company specializing in machine vision technology for factory automation.

7. Broader Economic Considerations

Interest Rates: The direction of interest rates will significantly impact small-cap and growth stock performance.
Currency Fluctuations: Exchange rate movements can significantly affect international investment returns.
Geopolitical Risks: Events like tariffs and global conflicts can impact specific sectors and markets.

Conclusion

Driscoll’s perspective emphasizes a shift towards a more diversified, value-oriented investment strategy. He advocates for a long-term focus on ROIC, international exposure, and careful consideration of the impact of emerging trends like AI and currency fluctuations. He cautions against emotional investing and encourages investors to build portfolios designed to withstand market volatility. He identifies specific companies and sectors with potential for growth, while also highlighting areas of concern and recommending a cautious approach to certain investments.