Market Musings 050725: looking for contrarian ideas
Market Musings 050725: looking for contrarian ideas
Video and report: Investment Strategy Focus July 2025
3 Contrarian Themes:
Clean Energy, Health care, European Dividends
1. Clean energy: What went up then came back down
The clean energy and energy transition themes (including solar and wind power) were very popular in the years leading up to 2021, leading to huge outperformance in 2019 and 2020 for clean energy ETFs.
2019-2020: the go-go years for Clean Energy
But then came the aftermath of this huge rise - as interest rates went up sharply, clean energy came under pressure due to the reliance of large renewable energy infrastructure projects on cheap long-term debt financing.
2021-2024: Unwinding of the Clean Energy Bubble
Finally, this year we have seen a modest resurgence in energy transition and renewable energy as interest rates have fallen, reducing the cost of debt financing.
Since the beginning of this year, the iShares Clean Energy ETF has risen 21% in US dollars, breaking the long-term downtrend in place since 2021 and returning double the performance of global stocks over the first 6 months of this year.
Clean energy finally looks to have bottomed
While the performance of clean energy and energy transition indices has been less impressive in euros and pounds, they have nevertheless reached double digits so far this year.
This theme should benefit from two factors:
The continued reduction in financing cost as central banks cut benchmark interest rates; and
The renewed focus on energy infrastructure investment as energy security becomes paramount following the Ukraine conflict.
2. Health care: a defensive growth sector under pressure from Trump and Kennedy
Over the long term, the global health care sector has proved an excellent defensive growth performer. This sector benefits from the ageing population trend in developed economies and the onwards march of medical innovation.
US Health care (XLV, in blue) has been a great long-term outperformer
However, health care stocks are under pressure this year following the election of Donald Trump and his selection of Robert Kennedy Junior as Health Secretary. Trump has announced his desire to see lower US drug pricing, which has put pressure on global pharmaceutical companies as they derive a disproportionate amount of revenues and profits from the American market.
As a result, the health care sector has lagged the continued bull market in global stocks this year…
Global Health care has not kept pace with the overall stock market in 2025
Certain key pharmaceutical stocks have held this sector back since mid-2024, including Novo Nordisk in Denmark and Merck in the US.
We have seen the health care sector suffer from regulatory threats to US drug pricing in the past, most notably in 1994-95 during the Clinton administration when Hilary Clinton was appointed as Health Secretary. Just as now, US health care stocks dropped sharply on the threat to prices of medications. However, once this threat did not materialise, the healthcare sector then recovered sharply in the following years. We could be seeing an equivalent entry point into pharmaceutical stocks today.
Astrazeneca could be another large-cap pharmaceutical stock worthy of another look, given that it has not progressed in the last 3 years in share price terms despite consensus forecasts for continued growth in revenues and earnings in 2026. .
3. European dividend stocks: offering generous income
Over the last 10+ years, US stocks have outperformed the rest of the world, driven in large part by the outperformance of large-cap tech growth stocks. In the process, European stocks and value stocks have lagged and have fallen out of favour with global investors.
However, this year has marked a surprising resurgence in interest both in the European stock market and also in income-oriented stock strategies. Over the first 6 months of 2025, the MSCI World index (including a 70%+ exposure to US stocks) has lost 3.5% in euros while the L&G Europe ex UK Quality Dividend stock ETF has returned +18% including dividends over the same period. It also offers a dividend yield around 4%.
European quality dividends perform well in 2025
UK dividend strategies are also performing well this year including the iShares UK Dividend ETF, which offers a running dividend yield of 5.5%.
Particularly for those investors who are looking for income, these ETFs look attractive alternatives to bonds and cash deposits.
Have a good week
Edmund
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
4 comments
So buy the Dip, eh?
Thank you Edmund. iShares UK Dividend ETF looks interesting for our income portfolio
There's also a UK equivalent to the L&G Europe ex UK Quality Dividend which is worth a look. I got burnt in the iShares UK Dividend ETF in the 2008 financial shake-out because it ended up being concentrated in a lot of poor quality stocks.
Robert, Just run an AI comparison on the two funds. Conclusion "
For an investor whose primary objective is a "safe yield," emphasizing the sustainability, reliability, and growth potential of dividend income over the long term, the L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK) appears to be the more suitable choice. Its explicit quality and ESG screens are designed to mitigate the risks associated with high-yield investing, aiming to avoid the "dividend trap" and fostering more consistent, reliable payouts. While its current yield may be slightly lower and its track record shorter, its strategic focus on dividend quality aligns more directly with the concept of a truly "safe" income stream. The lower expense ratio further enhances its long-term value proposition.
Conversely, if the investor's definition of "good yield" leans heavily towards the highest immediate income, and they are comfortable with the inherent risks of a less selective high-yield strategy, including potential dividend cuts and capital volatility, then the iShares UK Dividend UCITS ETF (IUKD) might be considered. Its established presence and superior liquidity are practical advantages."