Five stocks for investors who want to broaden their growth horizons beyond the S&P 500

By Philip van Doorn

Regardless of political risks, investors can be well served by participating in large economies with a rapidly growing middle class

U.S. investors know how successful a strategy of investing in the S&P 500 through an index fund has been, especially as large technology companies have led such strong growth over the past decade. But markets change, as is being proven by the rise in U.S. interest rates. And tech isn't always the leading choice for investing.

Below are five stocks described by two money managers who specialize in markets outside the U.S. for investors who wish to ride along with long-term growth trends.

First, to make the case that U.S. technology firms aren't always in the lead, here is a comparison of average annual returns over the past 10 years for the S&P 500 SPX and its sectors through Sept. 13, with the same calculations for the previous 10-year period:

Index or sector         Average annual return -- past 10 years  Average annual return -- previous 10-year period 
S&P 500                                                 12.3%                                             7.4% 
Information Technology                                  20.9%                                             6.7% 
Consumer Discretionary                                  12.5%                                             9.4% 
Healthcare                                              11.9%                                             7.9% 
Industrials                                             10.4%                                             8.3% 
Financials                                              10.0%                                             0.0% 
Utilities                                                9.3%                                             9.8% 
Consumer Staples                                         9.1%                                            10.0% 
Materials                                                9.1%                                             8.9% 
Real Estate                                              7.6%                                             9.0% 
Communication Services                                   7.4%                                             8.5% 
Energy                                                   5.1%                                            14.0% 
                                                                                               Source: FactSet 

The technology sector has been the runaway leader over the past decade, but the previous 10-year period told a different story.

In addition to looking beyond tech, which has such a high concentration within the S&P 500, investors might want to add exposure outside the U.S. to take advantage of growing middle classes in emerging markets and innovation in other developed markets.

Priyanka Agnihotri of Brown Advisory is based in London and manages the Brown Advisory Sustainable International Leaders Fund BISLX, which was established Feb. 28, 2022. Brown Advisory tends to hold 25 to 35 stocks of companies based in any market outside the U.S. During an interview, she discussed three of the fund's holdings, including HDFC Bank (500180.BY), which is the largest private bank in India, where government-owned banks have traditionally dominated financial services. The fund's benchmark is the MSCI ACWI ex-U.S. Index.

James Thom, Abrdn's senior director of Asian equities, also named three examples of non-U.S. stocks during an interview, including HDFC Bank. He is based in Singapore and works on various portfolios for the firm's private and institutional clients. HDFC Bank is held within the India Fund IFN, a closed-end fund established in 1994 that is available to U.S. investors, and for which Abdrn Asia Ltd. serves as adviser. IFN's benchmark is the MSCI India Index.

Here are three-year compound annual growth rates (CAGR) for the five companies' revenue and earnings per share through 2022, along with estimated two-year CAGR for these items from 2023 through 2025. For comparison, the same growth numbers and estimates are shown for exchange-traded funds that track the above-mentioned funds' benchmarks and the S&P 500:

Company                                          Ticker   Country  Three-year sales per share CAGR through 2022  Two-year estimated sales CAGR through 2025  Three-year EPS CAGR through 2022  Two-year estimated EPS CAGR through 2025 
HDFC Bank Limited ADR                              HDB    India                                            6.0%                                       21.7%                             13.6%                                     17.6% 
Deutsche Boerse AG                               XE:DB1   Germany                                         18.0%                                        3.4%                             14.1%                                      4.0% 
LVMH Moet Hennessy Louis Vuitton SE               FR:MC   France                                          13.9%                                        8.0%                             25.3%                                      8.9% 
Budweiser Brewing Co. APAC Ltd.                  HK:1876  China                                           -0.4%                                        8.3%                              0.6%                                     17.4% 
Taiwan Semiconductor Manufacturing Co. Ltd. ADR    TSM    Taiwan                                          29.9%                                       19.4%                             45.1%                                     21.3% 
iShares MSCI ACWI ex U.S. ETF                     ACWX                                                    -4.3%                                        4.8%                              3.8%                                      9.7% 
iShares MSCI India ETF                            INDA                                                    -2.0%                                        8.9%                              3.2%                                     14.9% 
SPDR S&P 500 ETF Trust                             SPY                                                     7.5%                                        5.1%                             11.0%                                     11.8% 
                                                                                                                                                                                                                        Source: FactSet 

Click on the tickers for more about each ETF, company or index.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page

The sales and EPS growth through 2022 and the growth estimates through 2025 are mixed but tend to be higher than those of the indexes.

Here are comments from Agnihotri and Thom about the five companies.

HDFC Bank

HDFC Bank is growing rapidly as private banks take business in India from government-owned banks, which haven't been investing in new technology, according to Agnihotri. She said she was comfortable with HDFC because the bank had taken a careful approach during multiple credit cycles. Now it has become a leader in making consumer loans easily available through smartphone apps.

Both Agnihotri and Thom pointed to a new growth opportunity for the bank through mortgage lending, which has been expanded after a complex transaction with its former holding company resulted in its taking on mortgage and life insurance subsidiaries.

Thom said HDFC has had a "fantastic track record, delivering consistent growth" along with that of the financial industry in India. He also pointed to the bank's scale as a driver of efficiency.

He described an evolution of the country's banking market, with an accelerating transition to digital services as the government develops its Open Network Credit Enablement system. This system "helps to aggregate personal data and credit histories on the digital network," to make credit easier to access for people in all socioeconomic groups," Thom said. The identification will be done with a thumbprint. Thom called this development "interesting and exciting," because it can open more forms of credit to large groups of people, rather than limiting the banks strictly to collateralized loans.

Deutsche Boerse AG

Deutsche Boerse AG is expected by analysts working for brokerage firms to show the slowest increases in revenue and earnings per share over the next two years among the five companies in the table, above. However, Agnihotri believes the company is reasonably valued, especially when taking cash flow into account.

She said that as the owner of the largest derivatives trading exchange in Europe, Deutsche Boerse has a special advantage because of high barriers for potential competitors and because it is also a major player in securities trading, custody and settlement services. The company has also been expanding its data and analytics business, she said, through bolt-on acquisitions.

"The business model is very attractive -- 80% of the cost is fixed," she said "You can grow with little incremental cost."

LVMH Moet Hennessy Louis Vuitton SE

It is easy to expect the popularity of luxury brands to continue to increase as the world's middle class expands. LVMH Moet Hennessy Louis Vuitton SE has no shortage of luxury brands, including the ones that are part of its name, as well as Tiffany, Christian Dior, Fendi, TAG Heuer, Bulgari and many others.

Agnihotri said she admires the company's "incredibly long-term" approach to managing the "balance between desirability and exclusivity" for its brands.

The conglomerate's last major acquisition was Tiffany in 2020, and according to Agnihotri, it has already doubled the unit's profits by increasing investments in marketing for what was already a strong brand. She said LVMH had done the same after acquiring Bulgari in 2011 and Dior in 2017.

"Dior is growing 20% annually. They have been able to raise prices [for a brand that is] potentially under-monetized," she said.

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