This Market Factors begins with me reconsidering my skepticism about thematic investing after extremely positive results from strategies used by Morgan Stanley. We move on to a warning about the Middle East ceasefire and the global oil market and we talk African frogs in the diversion section.
Equities
These investment themes are working
Morgan Stanley is forcing me to reconsider my views on thematic investing. Previously I’ve considered thematic investing as a marketing initiative - a way to write reports featuring other analysts at the same dealer - rather than a useful guide to investment ideas. But Morgan Stanley’s favourite themes are crushing the U.S. benchmark’s returns so I need to take another look.
Morgan Stanley’s thematic stock categories outperformed the S&P 500 by 27 percentage points in 2025 and are already leading the index by 12 percentage points in 2026. The sectors looking most promising now are defence, health care (specifically AI applications, “diabesity” and demographics-related stocks), AI infrastructure, and a robotic theme they call “humanoids”.
Morgan Stanley analysts predict that large language models (LLMs) would show a step change higher in capabilities this year and that Chinese developers would continue to find shortcuts making AI more efficient and affordable. They note that early indications suggest LLMs are improving effectiveness even faster than the analysts forecasted. Their expectations now point to a more sober assessment of sectors capable of implementing LLMs and AI (they are basically the same thing at this point) and continued intense demand for computing power.
The development of agentic AI - it goes beyond responding to prompts into autonomous planning, decision making and strategizing - has increased the demand for computing power and data centres beyond analyst forecasting. This bodes well for semiconductor manufacturing, memory, specialized construction labour, electrical transformers, energy storage (big batteries) and power backup.
Defence stocks are the biggest segment of a global initiative Morgan Stanley expects will see all major nations attempt self-sufficiency in the area of national security. This theme also includes critical minerals, nuclear power, clean energy, and natural gas producers. The Iran conflict should accelerate the proliferation of renewable power, LNG demand, electrical power infrastructure and energy storage.
Monday’s research report updating the favoured themes helpfully provided some lists of stocks. In the AI Infrastructure and Powering AI stock selections, Samsung Electronics, Nvidia Corp. (NVDA-Q), Microsoft (MSFT-Q), Apple Inc. (AAPL-Q), Arista Networks (ANET-N), Constellation Energy Corp. (CEG-Q), Brookfield Corp. (BN-T) and Cummins Inc. (CMI-N) are among those most likely to interest Canadian investors.
The Global Defence screen stocks include Solar Industries India, Airbus SE, Rolls Royce Holdings PLC, General Dynamics Corp. (GD-N) and RTX Corp. (RTX-N).
The Humanoid screen includes Hon Hai Precision, Horizon Robotics, Cadence Design Systems Inc. (CDNS-Q), Take Two Interactive (TTWO-Q), Palo Alto Networks Inc. (PANW-Q) and Roblox Corp. (RBLX-N).
Dado Ruvic/Reuters
Energy
Oil market still in flux despite cease fire
BofA Securities analyst Kalei Akamine warned clients against celebrating the cease fire too early in a Wednesday report. He noted that the stand down agreement is “explicitly short-lived” at two weeks.
Fully 11 million barrels per day of oil production remains unavailable to global markets and reactivating these fields could take months. Ships may soon be heading through the Strait of Hormuz, but global oil inventories continue to burn lower and the worldwide supply/demand imbalance continues to grow.
Current conditions are a huge change from 2025 when 400 million barrels went into storage in the second half of the year alone.
The analyst loves Ovintiv Inc. (OVV-T), a company with firm Canadian roots. The company has recently acquired supply through its acquisition of NuVista and is in the midst of selling non-core assets on the way to a vastly improved balance sheet. The stock trades at a discount relative to large cap peers and Mr. Akamine expects this to narrow.
A Gastrotheca mittaliiti, a new species of frog discovered in the Peruvian Amazon.Supplied/Getty Images
Diversions
Frog diversity and market behaviour
The phys.org site reported that the pattern of frog diversity in Africa results from the ice age that happened 12,000 years ago. Frog expert Gregory Jongsma benefited from a 2.5 million year-long climate record for central Africa using gas bubbles in glaciers, among other data.
During the ice age, the dryer climate resulted in the contraction of African jungles into small islands amid desert conditions where frogs took refuge. The regions where these islands, called refugia by scientists, existed were found to have more diverse frog species.
I am both amused and impressed by this type of niche study. It’s true on one hand that my life will not be affected by debates about frog diversity. On the other, however, I take these patterns of biodiversity and adaptation seriously as an intellectual pursuit.
The reason for this during work hours is that I strongly believe that the answers to asset market behaviour are based in biology - constant adaptation and the search for profitability as an analogue to the availability of protein in a biosphere - rather than the rigid world of physics equations. That is why How Nature Works: the science of self-organized criticality was such an important book for me.
The essentials
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Globe Investor highlights
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David Berman reveals some of the best ideas from Globe readers about where to search for yield
Quick hits
BofA Securities FICC quant strategist Irina Shaorshadze reminded me that the most sophisticated commodity market participants trade futures, not equities. The strategist is positive on crude, gasoline, soybeans, lead, gold and silver and underweight natural gas, lean hogs, corn wheat, cotton and copper. The most recent report highlights positive roll yields, which is a way of playing futures curves. Imagine a WTI crude futures curve when the six month futures price is US$65 per barrel and the three month price is US$72 per barrel. Holding a six-month futures contract for three months would see it increase in value by US$7 in this case if the curve shape remained the same. That’s positive roll yield.
Morgan Stanley global director of research Katy Huberty marketed a report suggesting that software holdings within private credit funds may imminently face a debt default cycle. This is a further step towards pessimism found in industry reports from just a month ago, from Goldman Sachs among others, suggesting that everything was fine and selling overdone. Private credit and private equity are dicey topics for the finance industry because investment banking departments made a lot of money pushing assets towards these funds, in some cases shamelessly, and marketing investments for them.
Citi analyst Asiya Merchant is very bullish on her sector: connectors and other components. This includes optical cables for data centre expansion and copper wiring for more industrial use. Connectivity is important for solar power generationm which is also boosting the sector. The analyst raised price targets for Amphenol Corp., Corning Inc. and TE Connectivity Ltd.
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