US stocks once again outpaced the rest of the world in 2024, rising over 25%, fuelled by the performance of stocks that benefit from the AI boom and the prospect of lower interest rates.

Yet, after the rally, valuations for US stocks appear expensive, based on Morningstar’s stock-level valuation models and top-down expected return estimates. Our asset-class valuation models point to low single-digit returns in the US, while we expect some of the most attractive opportunities to deliver double-digit returns over the next decade.

Thus, as we look for opportunities heading into 2025, our focus naturally shifts to regions outside the US, where investors may achieve better risk-adjusted returns.

Here we outline six opportunities for investors who are prepared to be contrarian. The first is the biggest stock market amongst emerging markets – China.

Past performance and a few false dawns have painted a bleak picture in recent years, but the potential upside remains. There are structural issues and key cyclical challenges that will take time to resolve so the road is likely to remain bumpy. 

Aging demographics, deleveraging, and weak consumer spending represent the core of the challenges. We are encouraged by signs that the authorities are prioritizing policy support to shore up the economy and we expect stimulus measures to continue evolving in the coming months.

A more benign regulatory backdrop, compared with a few years ago, is also constructive. Strong returns from the Chinese market toward the end of September and early October illustrated how the picture only needs to become ‘less bad’ to provide a tailwind to returns.

As a cyclical recovery takes shape, we anticipate moderate earnings growth from Chinese companies – but it will take time.

We also maintain a positive outlook on several of the major Chinese technology firms as consumers regain their footing.

However, careful management of total portfolio exposure is crucial, including sizing aggregate positions to account for the various regulatory, geopolitical, and economic risks in China.

The second opportunity is Korean equities. Samsung Electronics makes up around 23% of the Morningstar Korea Index. Softer memory demand for non-AI products and doubts over whether the company will qualify as a supplier to Nvidia, the world’s largest AI company, have led to shares underperforming recently.

But with shares trading at roughly 1.1 times book value, near the low end of Samsung’s historical range, these concerns look more than priced in. In its third-quarter 2024 earnings call, Samsung stated that it cleared an important phase in the qualification process for an undisclosed customer, likely Nvidia.

A ramp-up in shipments of its latest high-bandwidth memory chips could significantly improve Samsung’s fundamentals and catalyse a rerating.

Our third opportunity is closer to home and has been through the wringer in recent years – UK homebuilders.

At one point, they lost two thirds of their value from the 2021 lockdown highs. Share prices have rallied over the past year, but we still believe names in this space could rise by as much as 50%.

Lower interest rates are leading to more affordable mortgages, and supportive government policy should help pave the way in 2025.

Just as out of favour, if not more so, are European auto manufacturers. They face what seems like the perfect storm currently with an influx of Chinese electric vehicles, a weak Chinese consumer, and potential tariffs on exports to the US.

We see huge discounts on many of the big European names. We also believe that with so much negativity baked in, it doesn’t take much good news to move share prices in a positive direction

The 5^th and 6^th opportunities are in Latin America, the worst performing major region this year.

Mexico plummeted almost 22% in 2024 through to the end of October. Three catalysts have prompted the plunge, the first being profit taking after the huge outperformance over the prior 2 years.

The second catalyst was concerns about the future independence of the courts and rule of law following the presidential election in June. The third and more recent sell trigger, is anticipation of protectionist US trade policies and tensions related to border controls.

Upon closer inspection, the Mexican share market is actually sheltered from many of these issues due to its defensive sector mix, strong balance sheets and the more domestic nature of its revenues.

With prices and the currency reflecting excessive pessimism, it’s a good time to consider taking exposure.

Brazil is a higher-octane, more cyclical prospect, with deep discounts on offer after investors marked down asset prices on concerns about persistently high inflation, higher interest rates and the new regime meddling in the corporate affairs of behemoths Vale and Petrobras.

At current prices, Brazilian companies now offer generous yields, and a margin of safety not often found for those who can ride out short-term volatility.

All these opportunities flag the need for investors to tap into global research and build portfolios that can go beyond 2024’s best performing stocks and markets. 

From a style perspective, as growth stocks largely outperformed value since the global financial crisis, there are typically more growth-oriented strategies than value funds today, as the popularity of the former has grown over the years. That said, market sentiment has shifted towards value names more recently, and strategies with a growth style bias have suffered in terms of performance.

We have also seen a small but growing number of responsible funds emerge over the years. Some take a passive or active approach and may include a range of exclusions, such as tobacco and gambling, and/or solely focus on companies providing solutions to environmental or social issues.

Macro backdrop

The Asia Pacific region, excluding Japan, is characterised by rapid economic growth and technological advancement. Experts point to the benefits of investing in Asia, such as the favourable demographics in India, including a growing young and skilled population and a rising middle class, leading to increased productivity and spending.

In light of these factors, local economies have prioritised growth policies to attract investment. For example, there has been a notable expansion in technology and innovation during the past few decades, with the rise of global giants, such as Samsung and TSMC, that now play a significant role in the global race for AI technology and chip manufacturing.

While the region has experienced strong growth and development over the years, tensions between the US and China have created uncertainty that has had an impact on investor sentiment. Foreign investor sentiment was affected further by the weak post-pandemic economic growth in China and the property crisis.

However, in recent months China has introduced a stimulus package to boost economic growth. Interest rates were eased, for example, which has served as a catalyst for markets, alongside easing interest rates in the west.

Though these developments are seen as positive thus far, investor sentiment remains somewhat cautious. This is largely a result of the US election results, with many investors hesitant to increase exposure to the region until clear policies unfold post the inauguration of president Donald Trump.

Performance put to the test

A severely challenging period began for the Asia Pacific region in 2022, as most markets were heavily influenced by macroeconomic factors. The Russian invasion of Ukraine, fears of higher interest rates, global inflationary pressures, surging global commodity and energy prices, together with ongoing supply chain issues, including component shortages, all affected market sentiment.

Additionally, China’s property market woes and continued lockdowns contributed to the overall difficulties faced. As such, 2022 started with a risk-off period where there was a shift away from high-growth stocks, resulting in a heavy de-rating of valuations, particularly in the technology sector.

There was a wide dispersion of performance within the region’s markets over the course of the year. For instance, investor pessimism was high especially towards China, the largest market, which at one point was down 33% (at October end), but ended 2022 at -12%, thanks to the market rallying towards the end of the year on its recovery potential following pandemic lockdowns.

In the fourth quarter of the year, China announced the lifting of lockdown restrictions and the reopening of its economy. This led to an improvement in investor sentiment towards the region, and a more positive outlook.

Most of the region’s markets rebounded at the start of 2023, initially due to early optimism of China’s post-Covid economic reopening alongside lower growth expectations in the west. However, as the year progressed, market sentiment deteriorated and recession risk increased, primarily in developed markets.

Rising concerns over the state of the global banking sector and ongoing US-China tensions also had a negative impact. The poor pace of China’s consumption recovery weighed heavily on investor sentiment, with the country a key underperformer.

The Asia Pacific region began 2024 by underperforming the US and Europe during the first quarter, subsequently recovering and outperforming during the following quarters. This has been driven by rising optimism over the region’s strong potential and low valuations, alongside further expectations of rate cuts in developed markets and a soft landing in the US.

This was boosted in September by China’s announcements of stimulus across different areas of the economy.

However, investor uncertainty remains as to how the global geopolitical backdrop will unfold over the coming months.

Despite these challenges, fund managers continue to believe that China’s reopening presents numerous opportunities. They also predict Chinese consumer spending will increase over time driven by high consumer savings and an uptick in property sales. The outlook for the region remains cautiously optimistic, acknowledging both the potential for opportunities and the ongoing risks, with the latter namely geopolitical.

Overall, Asia fund managers remain positive on the long-term outlook, as they see significant opportunities, such as strong earnings growth for companies at attractive forward valuations.

Read the rest of this article, plus Amaya Assan’s funds to watch by assets under management, three-year performance and newcomers in December’s Portfolio Adviser magazine

Investors are on edge, grappling with uncertainty on multiple fronts as the US election fast approaches. With the outcome seemingly hanging in the balance, the potential impositions of blanket tariffs from a Trump presidency on all trade is concerning many. Such a move could spell trouble for the global economy, bringing potential implications for long-term geopolitical stability and fiscal discipline.

One significant tail risk we are monitoring is the impact of the US fiscal balance sheet. At around 4%, treasury yields are not overly concerning, but they reflect some uncertainty. While we do not anticipate a UK-like event in the US — a major bond sell-off akin to the Truss mini-budget moment — continued volatility in the bond markets leading up to and potentially beyond the election is likely.

While it is notoriously difficult to predict election results, and therefore subsequent policy of future administrations, the possibility of a Trump presidency focused on additional fiscal expansion and deregulation could push inflation higher, raising the yield of long maturity bonds as investors price greater long-run uncertainty in US bond markets. This ripple effect could inevitably be felt across the broader global bond market, as the US remains the benchmark for global fixed income.

See also: Morningstar: What does the US election mean for investing in China?

The potential imposition of blanket tariffs by Trump is especially concerning. While this could give a short-term inflationary boost to industries such as traditional energy, financials and defence, it could be disastrous for global growth over the long term. Take tariffs on China as an example. These have already led to a decline in US-China trade over the past few years and increased trade deficits with other countries. This rebalancing effect of blanket tariffs on US trade partners would complicate global trade dynamics.

The US economy has been sending mixed signals in recent months. The challenge lies in the core components of inflation, which seem inconsistent with the cut of over 1% the market expects from the Federal Reserve in the next 12 months. This creates a dilemma for the Fed, which must balance lowering inflation with a strong but potentially weakening labour market.

Historically, equity markets have shown more volatility during close and contentious elections. Given polling data indicates a tight race hinging on a few swing states, such uncertainty could spur heightened market volatility as investors react to polling trends and shifting political dynamics. While markets tend to calm after an election, investors should not assume smooth sailing in the immediate aftermath.

Policy changes, particularly those related to fiscal spending, taxation and regulation, could significantly impact sectors such as technology, energy and healthcare. leading to heightened market volatility as investors react to polling trends and shifting political dynamics.

Despite the noise, investors should remain steadfast: focusing on long-term fundamentals and preparing rather than predicting. Forecasting market responses to elections or economic data is fraught with risk. But discipline is needed — diversifying portfolios, managing risk and avoiding overreactions to short-term market moves.

While the election presents both short-term risks and opportunities, in line with past elections it is unlikely to have an impact on the medium-term expected returns of asset classes, but will stir potential short-term challenges.

While global bond yield curves may steepen globally pushing up longer term interest expectations, bonds remain an attractive asset class to hold with fears remaining around economic growth. We may also see volatility in equity markets as traders react to each other post-election, focus should be on the medium-to-long-term fundamentals — such as earnings and the discount rate — that will drive equity returns and ultimately client outcomes.

See also: Weekly Outlook: US election, UK and US interest rate decisions

Currency markets are also an area that may see volatility, especially if election results are delayed in swing states. However, we see little immediate threat to the US dollar’s status as the world’s reserve currency. Despite speculation, neither the euro nor renminbi are poised to replace the dollar.

Investors therefore should assess any risks within their portfolio and ensure they are resilient to adverse outcomes, while remaining flexible to seize opportunities that may arise during periods of extreme market stress.

Whether we face a Trump 2.0 presidency with potentially higher inflation or a Harris-led government which would likely be more of a continuation of the current administration, it is important to ensure that portfolios are diversified and robust.

By maintaining a disciplined, medium-term view and avoiding being swayed by the noise, investors can navigate the election with confidence, focusing on fundamentals rather than short-term volatility.

This article was first seen in our sister publication, PA Adviser

Since the launch of Vision 2030 in 2016, Saudi Arabia has embarked on a transformative journey aimed at diversifying its economy beyond oil dependency, and increasingly positioning itself as an attractive destination for tourists and investors alike. In October, more than 8,000 CEOS and business executives converged on Riyadh for the 8^th annual Future Investment Initiative Conference, further highlighting the Kingdom’s global and outward-looking posture.

One theme that resonated throughout the conference was the government’s recent shift toward bolstering the domestic economy. Headline deals clearly indicated that capital flows will now prioritise local markets, as evidenced by a $1bn agreement announced between the Saudi government and Hong Kong Monetary authority to support companies based in the Guangdong-Hong Kong-Macao Greater Bay Area looking to expand into the Middle East. Other notable developments included Cathay Pacific re-establishing direct flights between Riyadh and Hong Kong, dormant since 2017, and Japan’s announcement of a new Saudi equity ETF trading in Tokyo.

See also: “Franklin Templeton launches two Saudi Arabia funds“

The country is aiming for $100bn in annual foreign direct investment (FDI) by the turn of the decade. Last year, FDI flow reached $25.6n with United Arab Emirates, Luxembourg, France, Netherlands and the UK leading the way. While this focus on local growth bodes well for domestic markets, global emerging markets funds remain underweight in Saudi Arabia, averaging just 1.8% while the MSCI EM Index weight to Saudi Arabia is 4%. What explains this reluctance? Our view is that investors remain focused on execution of Vision 2030 and sustainability of reforms as they consider increasing their allocations to the Saudi equity market.

The Vision 2030 transformation, one of the boldest growth initiatives of its kind, should attract more attention than it already has. The Saudi equity market has produced eye-catching returns over the last five years, especially in dedicated active domestic equity funds. However, the challenge facing global EM managers goes beyond mere performance metrics. Over the last decade, passive investment strategies dominated overall flows while clients who favoured active strategies gravitated toward concentrated portfolios with typically between 25 to 40 stocks, or more diversified global EM strategies featuring 55 to 75 positions. The large universe of EM stocks necessitates fund managers to be highly selective, as index allocations heavily favour China and India. 

Liquidity is another critical factor as managers deploy billions of dollars to work across EM equity markets.  While the transformation of the Saudi economy is moving in the right direction and its IPO market is among the most vibrant in the world, the predominant liquid stocks are primarily in oil and financial sectors, typical for early-stage equity markets. This presents a dilemma: how to effectively capitalize on Vision 2030 growth narrative when foreign IPO allocations are limited, leaving funds less enthusiastic about the IPO pipeline. 

See also: “Mind Money: Are emerging markets poised for a comeback?“

Local investment managers have been able to add alpha as research coverage is still building up and because retail investors still comprise a large chunk of market, creating trading opportunities. While compelling investment opportunities may arise in the small and mid-cap sectors, global investors face critical questions.

How many positions can realistically be added to portfolios? Can substantial stakes be easily exited when needed? This is before valuations are even considered. Popular stocks have commanded jaw-dropping multiples – some trading at 100x earnings. Such lofty valuations can make it difficult to rationalize investment decisions when a wealth of alternatives exist across the rest of EM.

The uncertainty is further compounded by the fact many global managers have had minimal on-the-ground presence in Saudi Arabia and missed the fast pace of social reform. Significant progress has been made, firstly through “Saudisation,” an initiative which has been a key driver in developing local talent, working in parallel with other programmes to attract international talent to the Kingdom, such as the recent spate of incentives offered to companies establishing their regional headquarters in the Kingdom. In addition to this, female participation in the workforce has more than doubled to 35%.

Still, regional conflicts make it difficult for managers and their clients to commit significant capital in an area viewed as risky, despite the Kingdom being largely unaffected. Building confidence requires consistency, as well as deeper understanding of the local market dynamics and regional nuances.

Investing in Saudi Arabia represents a unique opportunity to participate in an ambitious economic transformation as the Kingdom pivots away from fossil fuels. While domestic investors enjoy the benefits that remain out of reach for many foreign players, global investors need to adopt a strategy to manage capital costs and asset allocation.

Which particular asset classes and strategies do you anticipate your intermediary clients focusing on in 2025?

At HSBC Asset Management (HSBC AM), we have a multi-strategy approach to managing solutions for intermediary clients in the UK. We have seen strong interest from UK Discretionary Fund Management clients for our ETF and Index range in Model Portfolio Service portfolios as investors are increasingly looking for more flexibility and choice. This is a growth trend continuing into 2025 and have recently launched the HSBC S&P 500 Equal Weight Equity Index fund for this client segment. 

In addition to passives, we’ve also seen growing interest and flows into active management, especially in asset classes such as Healthcare, India Equity and Fixed Income, Global Infrastructure and Global Equities. We have also transitioned our existing Global Property fund into a Global Listed Real Asset strategy solution for the UK market reflecting client demand which is another area of growth for 2025 in our view. Our multi-asset platform continues to remain a core part of our offering for clients in the UK wholesale segment, with more intermediaries outsourcing investment capabilities to model portfolio services providers it demonstrates that multi-asset is set to remain a core component of the market. We now manage over $157bn for clients globally in Multi Asset solutions and are seeing continued support from UK intermediaries within the HSBC World Selection and Global Strategy ranges.

See also: Track to the Future – with William Blair’s Tom Ross

Should end-investors – and, by association, asset managers – be thinking beyond equity and bond investments? Towards what?

Clients are already investing beyond pure equity and fixed income products and we have seen increasing interest in our World Selection multi-asset range. This range has exposure to a global infrastructure strategy run by our alternatives business which demonstrates how private markets are set to become increasingly important for end-investors and asset managers going forward. In time we’d like to see greater semi and illiquid strategies playing a broader diversification role within asset allocation models for end investor’s portfolios. However, challenges remain in supporting access to the space among intermediaries such as client suitability and operational factors, as well as UK fund platforms not currently being able to hold such investment strategies.  

In addition, research from the Investment Association (IA) has highlighted the importance of considering a wider range of asset classes in the current market environment. Monthly data published by the IA has revealed a wide array of best-selling asset classes among retail investors over the past year, ranging from government bonds to money market funds and global equities. This highly diversified support for a range of different investments is a trend that we expect to see continue into 2025.

To what extent do private assets and markets fit into your thinking? What are the currents pros and cons for investors?

HSBC AM’s alternatives business is a core area of growth for the UK, and we currently manage $71bn across diversified capabilities such as hedges funds, private markets, real estate, direct lending, infrastructure debt, listed infrastructure, energy transition and venture capital. 

One of the primary challenges for individual investors regarding private markets currently is the difficulty that many have in accessing the space outside of a multi asset strategy, rooted partly in the operational plumbing underpinning the UK IFA market such as UK fund platforms that still currently require daily liquidity. It is also important to consider the complexity of these assets from a client suitability perspective, which potentially leaves room for more work to make them suitable for UK retail investors, as well as regulatory factors which would need to be addressed to support wider access. That said, the development of Long-Term Asset Funds is aiming in the right direction. Broadly, however, we see the move towards private markets as the direction of travel for the industry and expect that it is only a matter of time.

Given client and regulatory pressure on charges, how is your business delivering value for money to intermediaries and end-clients?

We continue to see strong support among intermediaries and end-clients for our Global Strategy Portfolios. This is a globally diversified multi-asset solution offering an active allocation proposition with a passive fulfilment. It is one of our key propositions for the UK intermediary market and has offered great value for investors, consistently delivering strong returns and performing well against Assessment of Value measures while maintaining a focus on cost.

See also: Track to the Future – with Fidante’s Adam Brown

How much of your distribution is currently oriented towards climate change, net zero, biodiversity and other segments of sustainable investing? How do you see this approach to investing evolving?

Sustainable investing continues to represent a key element of our strategy at HSBC Asset Management. We manage over $70bn in ESG and sustainable strategies as of the end of last year and launched ten new ESG strategies globally throughout 2023.  One area which bears a lot of meaning for me is how we, as an industry, tackle social inequality. HSBC Asset Management gave me the opportunity of launching the social mobility programme a couple of years ago, and while all areas are important such as climate change and biodiversity, we do feel social inequality needs greater exposure.

How are you now balancing face-to-face and virtual distribution? In a similar vein, how are you balancing working from home and in the office?

The intermediary sector is an incredibly resilient part of the financial services industry that provide a significant level of financial advice for retail investors. Speaking with many advisers through and following the pandemic, a high percentage returned to operational normality rather quickly i.e. moving back to being in the office five days a week before other parts of the industry.  I find that it can be easy to gauge the health of the intermediary market by the number of industry events companies approaching us to participate at conferences, which has gone through the roof again in 2024! There’s a new proposal landing on my desk every week.

Personally, I am usually in the office around three to four days a week but it does depend on when I am seeing clients across Northern Europe, as well as the UK, so it can vary from week to week. While it’s important to meet with clients or colleagues in person, we do need a healthy balance of virtual engagement, with the most important factor being that we engage with our clients in a way that they prefer.  Call me old fashioned but I do still like putting on a suit and going into the office.

What do you do outside of work?

Like most parents my kids occupy most of my time one way or another. I’ve had the pleasure of being a 5am poolside swimming parent with my daughter through to spending most of my weekends away with my son who’s competed in motorsport championships across the UAE, Europe and more recently the UK.  One of my own activities which allows me headspace is walking my dogs.

See also: Track to the Future – with Federated Hermes’ Clive Selman

What is the most extraordinary thing you have seen in your life?

Seeing my two children come into the world holds the top spot but that’s an obvious statement! But in my previous life I think I must have been a structural engineer. I joined HSBC Asset Management in 2005 in a global role and remember watching the start of the site excavation for the Burj Khalifa in Dubai. In 2007 I had the pleasure of moving to Dubai with HSBC AM and witnessed the construction of the building which was one of the most amazing things I’ve seen. Even seeing the building in recent times brings a smile to my face. 

Looking a little further ahead, in what ways do you see the asset management sector evolving over the next few years?

As mentioned earlier, we anticipate private markets will likely play a key role in the evolution of the asset management sector in the years ahead. We are committed to this part of the market. So far, the growth has been more institutional, with pension and insurance funds moving into the market, but there is certainly a growing interest among intermediaries who want to develop a stronger understanding of how their clients can access the space.   

As the world’s fifth-largest economy and most populous democracy, India is increasingly important for global investors and policymakers.

Since 2000, GDP growth has averaged 6.2% in the context of a unique development model. Unlike many fast-growing emerging market (EM) economies, which relied on manufacturing as their engines of development (China, Japan, South Korea, etc.), India’s service sector is its growth engine. Equally impressive, in the last decade, India maintained its healthy growth rates in a context of relative macro stability.

Since 2000, India’s economy has been one of the fastest growing in the world. The country moved from the world’s 13th-largest economy in 2000 to the fifth largest in 2023 (in nominal terms). In purchasing power terms, the best approximation of transaction volume in the economy, India is the third-largest economy globally. In 2000, India’s economy contributed a modest 4% to global GDP growth. By 2023, its growth accounted for 18% of global growth.

See also: Macro matters: India’s tax glitch

One factor that works in India’s favour is a growing diversification of global supply chains. In what is known as the “China Plus One” strategy, businesses are increasingly moving away from an overreliance on China. As companies seek to diversify their supply chains, the question is how much India stands to benefit vis-à-vis its emerging market peers.

A constellation of an improving investment environment, better infrastructure, a growing high-skilled workforce, and government subsidies have set the stage for India’s high-end manufacturing to increase its competitiveness. There have been some successes, with companies such as Apple and Samsung establishing phone factories in India, as well as progress in attracting “green-sector” manufacturing, such as electric vehicles and solar power.

ESG considerations

The environmental, social, and governance backdrop can present both risks and opportunities. On environmental policy, India has moved quickly to adopt renewable power, with capacity doubling in the last five years; non-fossil fuel generation capacity now accounts for 44% of the total. Public health, energy self-sufficiency and import cost considerations motivated the government’s green energy development policy, which has presented investment opportunities. On social indicators, extreme poverty and infant mortality have shown steady declines in recent decades; notwithstanding, progress is uneven.

From a governance perspective, Prime Minister Modi remains popular in the context of solid growth and innovations like digitalisation, which have positively impacted the lives of many. However, there are concerns on two fronts: a) Prime Minister Modi’s concentration of power, and b) the BJP’s Hindu-centric stance and their handling of Muslim rights. These issues present potential political risks for investors.

Opportunities in Indian fixed income

The economic backdrop in India makes for a compelling investment opportunity. India’s stockmarket has attracted international attention as one of the top-returning markets over the past 10 years. However, we focus on an up-and-coming corner of the Indian market — public fixed income.

An essential part of the story for fixed income investors is India’s stable, investment-grade credit rating. India achieved investment grade status from Moody’s in 2004 (Baa3), S&P in 2007 (BBB-) and Fitch in 2006 (BBB-). The ratings have hardly changed over this time, though S&P moved to a positive outlook in May 2024.

Foreign investors can access both sovereign and corporate debt markets in India. One interesting market characteristic is that India does not issue foreign currency-denominated sovereign bonds; of the 15 largest developing countries, India is the only one with this distinction.

Instead, the local currency debt market is large and liquid because the Indian government has funded itself in rupees for decades. India has also not sought out foreign capital for government financing; foreign holdings of Indian government bonds are low at about 2.5% of debt outstanding (June 2024).

There have been new developments, in particular JP Morgan’s decision to add India’s government bonds to its mainstream EM local bond index, the GBI-EM Global Diversified. Indian bonds began phasing into the index in June 2024 and will increase to the maximum 10% index weight by April 2025.

Positive prospects

India provides interesting opportunities from several angles, ranging from the economic to the geopolitical. We are comfortable with the macroeconomic framework and see government policy supporting the private sector in the medium term. In turn, growth should remain strong in the next several years. It is noteworthy that the question is not whether growth will slow, but how much growth could accelerate if everything comes together, including a continuation of the reform agenda.

On the geopolitical front, India’s increasing importance is already evident in company decisions to diversify supply chains to hedge against potential China risk, as well as deeper strategic partnerships with countries like Saudi Arabia and the UAE. Given the trends in place, it is easy to imagine that India’s prominence on the global stage will continue to rise.

The sole criterion for inclusion within this sector is that at least 80% of a fund’s assets must be invested in sterling-denominated or sterling-hedged fixed-income securities, which helps to reduce the currency risk for UK investors.

Strategies within this sector are able to invest dynamically across different geographic locations, sectors and asset classes. The funds can also take varying levels of risk through exposure to credit and interest rates. They may invest into anything from developed market government bonds to high-yield corporate bonds and even equities (at a maximum of 20%). Strategic bond funds do not tend to use an index for asset allocation or performance-related comparison, meaning they are unconstrained when it comes to the shape of their portfolios.

Divergence and adapting strategies

‘Divergence’ is the key word for the current macroeconomic environment. We have heard contradictory views on expectations for a US recession. Some managers are looking at US payroll and unemployment data, which signals a soft landing and recessionary fears being overblown. Others are comparing current US treasury yield curves versus history and stipulating that while history does not repeat itself, it does rhyme, and are betting on a recession as a result.

We are witnessing a slowing US economy, a eurozone that is virtually stagnant and a UK that is uninspiring, and looking for the future catalyst that will spark growth.

Divergence, unfortunately, could mean added volatility. So, as we enter this new macroeconomic environment of rate cuts, investors making use of strategic bond funds may benefit by allowing managers to actively select the right assets at the right time to provide either capital preservation or appreciation. Divergence is the time when active fund management comes into its own.

Future drivers

Due to the Federal Reserve’s relentless ‘pause, pause, pause’ stance on interest rate cuts until recently, the impact on the consumer has become more profound. For this reason we cannot yet rule out a hard landing, which presents a tail risk for markets. As a result, many fund managers have continued to hold higher-duration risk as a successful play since May. The focus going forward will be on the labour market, however, which may be a key driver of markets in future.

When it comes to corporates, fundamentals are strong and the technical environment is very supportive, with record issuance of corporate bonds in August and September 2024. This issuance has been well absorbed by the strength of investor appetite, given the high yields on offer. Investors are locking in these yields and receiving a high income, which is proving positive for fund carry returns.

On the other hand, valuations are comparatively rich, and we may need to start to get accustomed to a lower risk premium for credits over government bonds, similar to the tight spread of the mid-2000s.

A common trade used by many managers is curve steepening, as the rate-cut environment facilitates the normalisation of the shape of the yield curves to pick up the extra yield.

Fixed income is therefore offering the potential for capital appreciation, diversification and a strong yield.

Looking ahead, we expect to see investors reallocate from cash into this asset class, while others reallocate from equities, again adding to fixed income on the back of expectations of a potential recession.

The benefits of strategic bond funds lie in their flexible investment mandates and ability to move extremely quickly on the back of economic shocks or market moves. This may prove significant during coming months as we enter into a new regime of monetary policy and geopolitical risks threaten to upset the apparent benign macroeconomic backdrop.

Delivering in a tough market

Strategic bond funds are once again delivering positive returns in 2024, following two years of bruising performance which accompanied a fall in assets under management. In the past 12 months , the tides turned and the sector grew by £2.8bn, and as at the end of August 2024, funds under management stand at £39.3bn, placing it in the top 10 largest IA sectors.

Asset class performance has been relatively individualistic. Credit spreads have remained strong in 2024 but government bond performance has been weaker overall. However, yields have started to fall as new monetary policy comes into play.

The funds that have greater exposure to rates and a bias towards investment-grade credit have underperformed. On the flip side, those with more credit risk, through a greater weight to high yield and subordinated debt, are producing more positive returns.

The story has demonstrated how investors taking on extra duration risk has not resulted in wildly higher returns. Lower-duration funds have performed almost in line with higher-duration ones, but with lower volatility.

Should we see a complacency trend towards credit risk, this could be worrying due to the historically tight spreads and recessionary risks that are still at play despite the resilience of the employment market.

One cannot ignore surprise geopolitical shocks such as the worsening conflict in the Middle East and potential outcomes of the US presidential election. Such events tend to be inflationary and while strategic bond managers remain generally optimistic for the future, there remains a great deal of market uncertainty.

Read the rest of this article, plus Eduardo Sánchez’s funds to watch by assets under management, three-year performance and newcomers in November’s Portfolio Adviser magazine

When is an alternative not an alternative? To answer this, it’s worth starting by defining what exactly constitutes an alternative investment. The UK asset management industry is responsible for some £2trn of alternative assets versus some £11trn in mainstream assets. The very size of this universe reflects that fact that the alternatives label encapsulates a broad range of different asset types and approaches.

For many, a simple definition may be something that isn’t categorised as equity, fixed income or cash which are considered the traditional components of portfolio construction. I’ve covered multi-asset funds as a fund analyst for many years and in this context, I’ve seen many different genres of funds banded and labelled under the broad alternatives banner.

Asset classes grouped into alternatives buckets include, among others, private equity and debt, digital assets, infrastructure, real estate and commodities such as gold. Within the hedge fund/absolute return sector alone there are further strategies that might fit under the alternatives label with long/short equity funds, global macro funds and CTAs (i.e. trend-followers) being some of the most familiar. While digital assets are a newer kid on the block, regulators and lawmakers are beginning to facilitate their more widespread use.

The growth of alternative allocations in multi-asset portfolios has been an observable trend for many years now. Popularity grew during the lengthy low inflation era when traditional bonds offered little in the way of yield and carried the risk of capital loss for those worried about a shift in the interest rate regime. In this environment, alternatives were a natural diversifier. More latterly, despite a regime change and a more attractive bond market, alternatives have maintained their appeal in portfolios. 

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A recent look at well-known private client benchmarks showed that currently the ARC balanced benchmark has an allocation to alternatives of approximately 30%. Many DFMs and MPS managers are represented here.  Within the PIMFA conservative allocation, around 17% was allocated to alternatives and a 10% allocation now appears to be commonplace in high-net-worth portfolios. However, at a headline level, it can be difficult to see what type of strategies constitute these allocations because of the breadth of the definition. 

What is key when defining an alternative is a consideration of different risk and reward outcomes. Indeed, this is what makes alternative investment funds and strategies so useful for long-term investors and their portfolios.  They should offer a different risk/reward profile to the traditional asset classes investors are more used to seeing in their portfolios, namely equities and bonds.

A well-managed allocation to alternatives can offer a low and even negative correlation to these other asset classes helping with overall portfolio diversification. As an example of a compelling portfolio diversifier, we would highlight the BlackRock European Absolute Alpha fund which holds a Square Mile AA rating. This is a long/short equity strategy which is managed with a low net market exposure and which aims to deliver a positive absolute return over a 12-month period regardless of market direction. 

Another fund worth mentioning is the Square Mile A-rated WS Ruffer Diversified Return fund. This fund also aims to provide positive returns in all market conditions over any 12-month period with an emphasis on preserving capital. It adopts a multi-asset approach and its holdings will typically include a blend of growth (mainly global equities) and defensive assets such as cash, conventional bonds, index-linked bonds, precious metals and derivatives. This deployment of derivatives to hedge directional market risks is a particular feature of this strategy.

Portfolio diversifiers such as these aim to deliver strong performance (in absolute or relative terms versus markets) particularly during stressed market conditions, when volatility is high or rising.  It is this key characteristic that makes such funds attractive when held in a portfolio.

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Which alternative to pick matters to ensure that an allocation to such assets and funds does indeed offer diversification. For example, a highly correlated equity focused absolute return fund will do little to offset the downside of equities during a sell off. Attitude to liquidity, risk and complexity are also pertinent to the selection decisions. Gold and infrastructure are relatively simple to understand while the black box perception of CTAs and global macro funds are more complex and often less transparent. This doesn’t necessarily make them bad but a higher level of due diligence will be needed.  

In addition, those who also value non-financial objectives may find the broad church of alternatives appealing.  For example, private markets and real assets can be one of the most impactful ways of gaining exposure to sustainable or responsible investment themes. It is worth noting that, while many alternatives strategies have daily liquidity structures under the UCITs framework, others such as private markets may be less liquid, but can be invested through closed-ended vehicles.

It is therefore important that portfolio managers and fund analysts are on top of allocations to alternatives and understand with granularity as well as in totality, the risks and rewards that an allocation to these strategies are contributing to portfolios. Most importantly, it is key to ensure that they are fulfilling their job of diversification alongside traditional assets, stocks or funds that are held in the portfolio… otherwise an alternative may not end up being one.

Indeed, when looking at the IA’s flow data to the end of July, the sector has only had one month of inflows since July 2021 – a rather modest £87m in August 2021.

Aside from the smallest 10 funds in the sector, all of which currently have assets below £50m (often a ‘magic number’ for fund selectors), there are plenty of options available across a variety of styles. There has been somewhat of a Darwinian mentality at the upper end of the AUM scale and it is worth noting that the 10 largest funds account for more than half of the sector’s assets.

This has led to some strategies being soft-closed, while others have looked to limit capacity by other means, deliberately elevating fees to deter investors and placing a limit on the number of units in issuance, for instance.

Liquidity remains a vitally important consideration for fund managers and fund selectors alike, given there are very few hiding places in this asset class in times of market stress.

A hard launch

The lack of investor interest is a likely indication of how difficult it is for new strategies to make an impression in the sector. Indeed, there have been only three new funds launched since 2020: WS Whitman UK Small Cap Growth in December of that year; and SVS Dowgate Wealth UK Small Cap Growth in March 2022, with both having solid return profiles against the peer group average since their respective releases.

The most recent addition is WS Raynar UK Smaller Companies, launched in July 2024 and managed by experienced UK small-cap investor Philip Rodrigs.

Unsurprisingly, given the backdrop for the sector, assets across the three funds remain fairly modest.

Read the rest of this article, plus John Monaghan’s funds to watch by assets under management, three-year performance and newcomers in October’s Portfolio Adviser magazine

Which particular asset classes and strategies do you anticipate your intermediary clients focusing on in 2025?

I expect we will continue to see a focus on long-only equities, global equities (including emerging markets equities), and various flavours of US. equities. While there has been a strong focus on US large-cap equities, we may see more interest in small- and mid-cap US equities (perhaps leaning towards the smaller end of the capitalisation spectrum). I also expect emerging markets debt to become more prevalent as the US Federal Reserve cuts interest rates and the desire for longer-duration assets increases.

Should end-investors – and, by association, asset managers – be thinking beyond equity and bond investments? Towards what?

Yes, I think they should. Asset managers have to understand their capabilities and where they can add value for end investors. A firm such as William Blair, for example, should not try to do everything in private markets. At the same time, I do think individual investors should be thinking about private markets. Most of the global economy is in private markets, so it would be unfortunate to ignore it.

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To what extent do private assets and markets fit into your thinking? What are the currents pros and cons for investors?

Private markets are for those who have longer investment horizons and an appropriate fee budget to ensure that they’re not investing in products that don’t actually provide the hoped for risk-adjusted returns. Illiquidity can be a challenge for individual investors with shorter time horizons.

Given client and regulatory pressure on charges, how is your business delivering value for money to intermediaries and end-clients?

I think the question is not one of absolute price but of price relative to the alpha being generated. That is what we focus on. We recently reviewed all our commingled vehicles and made some changes to pricing, reducing management fees and lowering caps on expenses. I would argue that these changes have been driven more by the increased competition, particularly from passive solutions, than an erosion of the alpha potential.

How much of your distribution is currently oriented towards climate change, net zero, biodiversity and other segments of sustainable investing? How do you see this approach to investing evolving?

ESG integration is an important part of our investment processes. William Blair is a quality growth manager, and for that reason, our investment philosophies naturally tend to lead us away from some of the industries that have the largest carbon footprints. We have also developed sustainability-focused global and US equity portfolios. These portfolios invest in those companies we determine to be best-in-class from an ESG point of view and companies that we believe will enable the energy transition, biodiversity, etcetera. We also allocate a small part of the portfolio to what we describe as “improvers,” companies that are not necessarily best-in-class but are addressing their weaknesses and potentially offering the chance of a re-rating.

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How are you now balancing face-to-face and virtual distribution? In a similar vein, how are you balancing working from home and in the office?

We are in the office three days a week to encourage collaboration and mentoring while benefiting from the productivity gains that colleagues experience working from home. We’re doing the same thing with our clients. More meetings are virtual, which is extremely time-efficient from a travel point of view but doesn’t allow you to build strong relationships. We also try to have some of our meetings with clients in person, where it’s easier to have broader conversations. I think we’ve found quite a good balance.

What do you do outside of work?

I spend time with my family. I’m a Francophile, so I enjoy spending time in France, eating good French food, and drinking good French wines. I’m a keen photographer, and I play tennis, ski, and jog occasionally.

What is the most extraordinary thing you have seen in your life?

On a safari in Tanzania, I saw a female cheetah teaching her two young cubs to hunt an antelope and bring it down. We weren’t in a car; we were standing a few hundred metres away. There was clearly education taking place, and it was quite spectacular.

Looking a little further ahead, in what ways do you see the asset management sector evolving over the next few years?

I think we will see continued consolidation of asset managers, pressure on pricing with the growth of passive, and increasing interest in private markets (not only institutionally, but also within the wholesale channel).

See also: Track to the Future – with BlackRock’s Heather Christie

Thomas Edison would be shocked by the ways electricity has been used since he helped market its potential back in the 1880s. He’d be even more astonished to learn that, despite all the technological advances this century, electricity usage in the US remained flat, owing to grid efficiency gains, until 2021. This has all changed over the last two years.

The use of artificial intelligence has begun to intensify electricity demand. Edison was not the first to use electricity nor did he in fact invent the lightbulb. His success was in taking existing technology and making it commercially viable. Likewise, AI has been used for years, but it is the start of its commercial proliferation that is so exciting to investors.

How best then to get exposure to the AI theme? We ought to remember how Edison’s story ended. He was ultimately defeated by a superior commercial technology. For us as investors, predicting the winner is what counts in these nascent technologies, not just who did it first.

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Yet it is hard to tell who will have the best lightbulb. Will ChatGPT supplant Google search? It is hard to know. What we do know is that a ChatGPT query uses up to 10 times more electricity than a Google search.

The rush for commercial uses of AI therefore sets the stage for sustained electricity demand. A 2-3% increase in electricity usage since 2022 doesn’t sound like much, but in the context of the trillions of watts in existing global demand it is massive.

Newer data centres, the ones required for commercial AI, can require up to one gigawatt of electricity capacity annually. One megawatt is what a big box retailer uses (think an out-of-town Tesco). A gigawatt is roughly what it takes to power San Francisco, or 1000 Tesco’s. A new data centre could theoretically need a similar amount of power to San Francisco.

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So who are the real winners here?

We think there are two – energy producers and the enablers of energy related infrastructure.

While the big tech companies battle over AI supremacy, they are united by their requirement for electricity. All forms of energy production should benefit from this next leg up in demand. In the context of climate change, data centres specifically need clean (carbon free) baseload (always on) power generation.

Wind and solar are clean but suffer intermittency. Oil is dirty but can provide power when it is still and cloudy. Natural gas goes someway to reconciling this problem, as it is cleaner than oil while being accessible and affordable in the US. That is why exposure to responsible oil and gas producers is quickly becoming a derivative exposure to AI and part of the reason they form a part of our portfolio.

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Better yet NVIDIA, Microsoft, Meta, Amazon, Google and Oracle have all made pronouncements on the need for zero-carbon nuclear energy to become an increasing part of the mix to properly fuel data centres.

A nuclear power plant being specifically built to plug into a data centre might sound like science fiction, but it is quickly becoming a reality as small modular reactor (SMR) projects take off. Nuclear reactors must have uranium, which is another theme for us.

Not only should the commodity producers benefit, but so too will the servicing companies, pipeline operators and shippers. The infrastructure surrounding energy transmission and transportation is just as important as what it is produced from.

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We hold companies that stand to benefit from a continued surge in AI demand regardless of which version of AI wins – such as those helping to develop data centre sites, creators of pylons and steel utility poles, plus the IT infrastructure including servers

These themes and companies are less obvious beneficiaries of an AI boom, but they have the potential to be just as rewarding. They are cheaper and less well known than the big tech companies while still growing quickly and carrying far less risk of technological supplantation.

We think these areas go one better than the picks and shovels in the AI gold rush. The energy related commodities and industrial infrastructure companies have the potential to be more like the wood and iron from which the picks and shovels are themselves made.

Recently announced plans by the London Stock Exchange (LSE) to eliminate fees for real-time market data has been warmly received by retail brokers and market participants.   

By taking this step, the LSE is not just focusing on its bottom line – it’s genuinely working to democratise capital markets and create a more inclusive environment for individual investors.

The change, which will come into effect from January next year, has been lauded for helping to create a more equitable marketplace where everyone can compete more fairly with institutional investors. It also means they will have the research tools they need to delve into investment products and themes they may not have considered or fully grasped before.

Using market information to improve trading outcomes

Free-fee access to real-time market data can make a world of difference for retail investors who may have previously faced barriers to obtaining timely and accurate information. In today’s fast-paced financial world, having access to up-to-date data is essential for making informed investment decisions – or risk missed opportunities or misinterpretations leading to less robust investment decisions.

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With free access to real-time data, retail investors can keep tabs on stock performance, watch market trends, and react quickly to changes. This not only gives individual investors a sense of empowerment, but also levels the playing field, helping them make more informed investment choices based on the latest information rather than relying on outdated data.

This can significantly enhance trading outcomes for retail investors. They can analyse patterns, assess risks, and adapt their strategies based on what they see happening in the market. This creates a better trading experience for individuals, allowing them to engage more confidently in the markets.

Enhancing market liquidity

One of the most significant impacts of this initiative is its potential to boost market liquidity.

Market liquidity is about how easily assets can be bought or sold without causing large price swings. High liquidity is beneficial for everyone involved, leading to tighter bid-ask spreads, lower trading costs, and more efficient price discovery.

1. More participation from retail investors: By providing free access to real-time market data, the LSE is likely to encourage more retail investors to jump into the market. When individuals feel empowered with the necessary information to make informed investment decisions, they are more likely to engage actively. This increased participation can lead to higher trading volumes, which is great for market liquidity.
2. Higher trading volumes: With more retail investors entering the market, trading volumes are expected to rise. Increased activity means more buy and sell orders, creating a livelier and more liquid market. More trading helps ensure there are enough buyers and sellers, which is essential for keeping liquidity strong.
3. Tighter bid-ask spreads: As liquidity increases, so do the chances for tighter bid-ask spreads—the gap between what buyers is willing to pay and what sellers are asking for. Tighter spreads benefit everyone by reducing trading costs and increasing the efficiency of transactions. The more retail investors get involved, the more competition there is, which leads to these tighter spreads.
4. Market resilience: A liquid market can also better handle shocks and volatility. When there are many participants ready to buy or sell, it helps absorb fluctuations in prices, ensuring that trades can be executed without major price impacts, even during turbulent times.

Long-term industry implications

By removing financial barriers to accessing market data, the LSE is likely to encourage greater retail participation in the capital markets. An increasing number of individuals, especially younger investors, are becoming interested in investing. They are often looking for platforms that offer transparency and accessibility.

As retail investors gain more access to information, they are more inclined to explore various investment opportunities and actively engage with the market. This increase in participation can lead to a more diverse and dynamic investor base, benefiting the overall economy.

See also: Are the negative flows from UK equity funds justified?

The LSE’s decision to provide free access to real-time market data has exciting implications for the financial industry. As retail participation grows, financial services firms may innovate to cater to a more engaged investor base.

This could mean developing new tools and resources aimed at enhancing the overall investor experience, such as educational content, user-friendly platforms, and analytical tools.

Additionally, as retail investors become a more influential force in the market, firms will need to adapt to meet their needs and preferences, leading to a more customer-focused approach in the industry. We have seen the likes of Freetrade, Robinhood and Trading 212 offering securities lending to retail investors as a new development, for example.

Empowering investors

The LSE’s move to eliminate fees for real-time market data is a significant step in making capital markets more accessible for retail investors in the UK. By enhancing access to information, improving trading outcomes, and boosting market liquidity, it empowers individual investors and fosters a more vibrant investment landscape.

As retail investors gain greater access to vital information and engage more actively in the markets, the entire financial ecosystem stands to benefit. This initiative paves the way for a more inclusive and dynamic future for all investors.