As the Chinese zodiac turns to the Year of the Snake, investors are left wondering what the new year holds for its equity markets.

Traditionally associated with wisdom, strategy, and adaptability, the snake offers a fitting metaphor for navigating the twists and turns of China’s economic landscape and geopolitical environment.

Trade war with Trump

China’s growth paradigm since late 2020 has been a two-speed model – a very strong export machine with poor domestic consumer demand. Its trade surplus hit a record high of about $1trn in 2024, while its 10-year government bond yield hit a record low of 1.6% with its economy trapped in a deflationary cycle with weak consumer confidence.

President Trump’s re-election and the prospect of a new trade war will threaten the sustainability of export growth, as exports to the US account for about 3% of China’s GDP.

How the forthcoming trade war is fought matters a great deal. A modest and gradual increase in tariffs is unlikely to derail export growth, but a strong and swift tariff increase scenario would put considerable pressure on economic growth in the foreseeable future.

The range of outcomes is very wide, and the path to the end game is highly uncertain. Investors need to stay agile and prepared for volatility and opportunities.

Bolder fiscal stimulus

The narrative changed significantly after the critical policy pivot in the last week of September 2024. While this was seen as an inflection point in stimulus policy, the follow-through so far has fallen short of investors’ expectations.

A crucial reason for the lack of a big bazooka so far is that policymakers don’t yet know which one to bring out. The size of the bazooka is dependent on the severity of the trade war.

As Trump prepares to fire his initial shots after being formally sworn in, they will assess and adjust the size of the stimulus accordingly, and the National People’s Congress in March will offer a timely occasion for them to do so.

Much bolder fiscal stimulus focusing on boosting domestic consumption would improve consumer confidence and rekindle the animal spirits.

Capital market reform

One policy directive that investors have not paid enough attention to are Beijing’s plans to “invigorate the capital market” by “using the capital market as a lever (to boost economic recovery)”. A better and more efficient capital market serves to achieve two important goals. 

Chinese households firstly need a new avenue to store, invest, and grow wealth. This role was previously fulfilled by the property market.

House ownership is high, and 60% of household assets sit in property. The best days of the property cycle are behind us, and the negative wealth effect of the property downturn is hurting consumers’ willingness to spend.

A deep, efficient and transparent domestic capital market with a strong pool of high-quality public companies that can deliver good long-term shareholder return is a very convincing and much needed alternative.

Another important problem that needs fixing is the state-owned banks’ ineffective and wasteful lending driven model, which is no longer fit for purpose in a technology and innovation driven stage of growth.

The bank lending model works fine when growth is driven by funding manufacturers with tangible plants and equipment. However, when the new sources of growth are mostly in innovative industries with more intellectual property and intangible assets, a deep capital market with sophisticated risk takers from venture capital, private credit and equity, and patient long-term institutional investors plays a much more important role in allocating capital efficiently.

China’s efforts to reform its capital market would improve corporate governance, raise the quality of listed companies, and in turn, boost shareholder return.

Stimulus policy is more important than trade war

Trump’s recent re-election brings the trade war narrative back to the forefront of many investors’ minds. The Year of the Snake is going to be a tug-of-war between domestic policy stimulus and the trade war, which will bring plenty of good investment opportunities that may come with some manageable volatility.

How policymakers will apply  stimulus policy tools to boost consumer confidence to fight deflationary pressures, and respond to the trade war and its impact on export growth is the most critical driver of equity market returns in China.

The policy pivot at the end of September 2024 was a critical turning point. It signalled that at long last, the policymakers acknowledged the long-term damage of the deflationary pressure and poor consumer confidence and signalled their willingness to fight.

In essence, this put a floor on economic growth and asset prices. What remains to be seen is whether the policy goal is to merely arrest the downturn or to get the economic engine humming again.

A trade war would undoubtedly put pressure on external demand growth, but it could also serve as a much-needed final kick that policymakers need for unorthodox and bolder reflationary stimulus policies, which is a more important driver for asset prices in China.

Venture Capital Trusts (VCTs) have been instrumental in fostering entrepreneurship across the UK since their inception in 1995. These funds provide tax-efficient investment opportunities for individuals while channelling essential capital to early-stage innovative businesses.

The past few years, however, have tested the resilience of VCTs and their portfolios. Rising inflation, interest rate hikes, and political instability have created a challenging environment for the growing companies backed by VCTs.

Despite these challenges, the most recent Budget underscored VCTs as a means of revitalising the UK economy. This endorsement by the Labour government could prove to be a pivotal moment for the sector.

Reanimating VCT fundraising

The VCT fundraising landscape has evolved significantly, shaped by both macroeconomic pressures and changing investor expectations.

Investors remain drawn to the tax benefits of VCTs, which include up to 30% income tax relief on investments of up to £200,000 per tax year, provided shares are held for at least five years. Dividends are also tax-free, and any capital gains realised upon selling VCT shares are exempt from capital gains tax.

See also: Edison: Saba’s ‘sub-par corporate governance’ is breaching FCA rules

These incentives have made VCTs particularly appealing to IFAs advising clients on tax efficiency. But at the same time, uncertainty brought on by high inflation and interest rates has prompted greater scrutiny, with IFAs and individual investors conducting more rigorous due diligence. 

This translates to heightened interest in fund performance and the resilience of underlying companies. Investors are not only seeking growth but also assurance that their capital is being deployed into businesses capable of navigating economic turbulence.

Over the last couple of years, the higher interest rates and stagnant economic environment have created new challenges for the growth companies that VCTs look to back. These conditions have required fund managers to refine their approach to identifying and assessing potential investments.

See also: ‘Strap in’: Trump returns to questions on tariffs and inflation

In today’s climate, VCT managers place an even greater focus on understanding how companies can weather economic challenges and adapt to evolving market conditions.

Restaurant chain Farmer J, which joined the ProVen VCTs’ portfolio in early 2024, exemplifies this. The brand closed all its restaurants during the first lockdown but quickly adapted by reopening its sites to serve home deliveries and continue trading despite an empty city. Since then, the chain has added three new sites and grown revenues – by backing businesses with proven resilience, managers can build portfolios prepared to thrive in uncertain times.

The cautious optimism in the market is reflected in the £882m raised by VCTs in the 2023/24 tax year – the third-highest figure on record – as well as the significant fundraises already delivered in the latest tax year by the likes of the British Smaller Companies VCTs and Mobeus VCTs.

Encouraging signals from the Budget

The Autumn Budget of 2024 reinforced the government’s support for VCTs, with the Chancellor highlighting their role in supporting entrepreneurship.

This followed the earlier extension of the sunset clause for VCT and EIS schemes to April 2035 – a decision that provided much-needed certainty about the future of VCTs for fund managers and investors alike.

It also reaffirmed the government’s commitment to maintaining the tax benefits of VCTs while introducing tax increases in other areas, such as higher capital gains tax rates. These changes have enhanced the tax appeal of VCTs, sparking renewed interest among high-net-worth investors seeking shelter from rising taxes. 

See also: PA Live A World Of Higher Inflation 2025

Moreover, the government’s commitment to innovation was evident in the £20.4bn allocated to research and development (R&D) for the year. This investment aligns with the mission of VCTs, creating fertile ground for portfolio companies in high-growth sectors such as healthtech, climatetech, and artificial intelligence.

These policy measures reflect the Government’s recognition of growth companies – including those backed by VCTs – as vital drivers of economic growth.

Yet, fund managers must remain vigilant, ensuring investments contribute meaningfully to this broader agenda while still delivering returns for investors.

Resilience and opportunity

The VCT sector’s 30-year history demonstrates an ability to weather economic downturns and emerge stronger.

From the dot-com crash of the early 2000s to the 2008 financial crisis, periods of upheaval have tested VCTs, but also revealed their potential. Businesses that pivot, embrace technology, or address societal challenges can thrive amid downturns, creating opportunities for bold, innovative companies.

See also: RBC’s Justin Jewell resurfaces at Ninety One

Today, we find ourselves at a similar inflection point. Rising interest rates and inflation present undeniable challenges, but they also create opportunities for disruptive technologies and resilient business models.

For VCTs, the alignment between government policy and their mission is encouraging. Potential lies in supporting entrepreneurs who are not just navigating adversity but turning it into opportunity.

The journey ahead for VCTs continues to be one of resilience and innovation. With economic headwinds come challenges, but also a renewed sense of purpose. This could be a moment to drive meaningful growth, both for investors and the broader UK economy.

The money market fund (MMF) landscape is set to evolve this year in response to shifting macroeconomic conditions and advances in digital finance.

Central banks around the world are likely to continue adjusting interest rates downward – a trend that could have a significant impact on the MMF sector. At the same time, new technological innovations such as tokenisation are poised to revolutionise how these funds are used, traded, and managed.

Rate cuts

Money market funds have enjoyed a renaissance in recent years thanks largely to rising interest rates. These vehicles became increasingly attractive to institutional and corporate investors seeking security, liquidity, and yield (the so-called SLY factors).

With rates hovering around 5% in many markets during 2023 and into early 2024, MMFs were seen as an attractive safe haven, bringing in over $6trn in assets in the US alone. However, the outlook for 2025 suggests that the days of high returns from MMFs may be numbered.

See also: ‘Strap in’: Trump returns to questions on tariffs and inflation

Several central banks have cut interest rates as they seek to manage economic slowdowns and deflationary pressures. The recent re-election of Donald Trump has also introduced new complexities into the macroeconomic outlook.

Potential shifts in fiscal policies such as tax reforms and trade measures may influence the Federal Reserve’s monetary stance, creating ripple effects on global interest rates and the MMF market.

Even if rates drop lower, MMFs will remain relatively attractive compared to the near-zero or even negative yields seen in the pre-pandemic years. However, fund providers will face new challenges in a lower-rate environment.

Investors, particularly those accustomed to fee waivers or low fees, will continue to demand competitive services while also expecting the high yields of recent years. This could place significant margin pressures on MMFs and their providers.

See also: PA Live A World Of Higher Inflation 2025

At the same time, the competitive landscape in the MMF industry is set to intensify. As yields decline, the ability to differentiate through service offerings will again become even more important.

Providers that have embraced automation and enhanced their digital capabilities will be in a better position to weather the changes. Automation of trading, sweep, settlement, and reporting processes not only improves operational efficiency but also enhances the investor experience, allowing fund managers to offer more value to clients at a lower cost.

Automation

Automation will continue to play a critical role in the future of money market funds, especially as investors seek to streamline their operations and reduce costs.

It has become a key differentiator for fund providers and portals. By digitalising the entire MMF investment process, from trade execution to settlement and reporting, Calastone’s Money Market Services (MMS) solution allows fund providers to offer a seamless, real-time investment experience. This not only improves efficiency but also reduces risk by eliminating manual intervention and the potential for errors.

See also: AXA CEO leaves for new role at M&G

As central banks cut rates, the pressure on margins will increase, forcing more fund providers to look for ways to optimise their operations. Automation offers a clear path forward, enabling providers to maintain profitability while continuing to deliver high-quality services to their clients.

In 2025, we expect to see more fund managers investing in automation technologies as a means of staying competitive in an increasingly commoditised market.

Tokenisation – the next frontier

While rate cuts and automation will dominate the headlines, another major trend in the MMF space is the rise of tokenisation. It refers to the process of converting rights to an asset, such as a money market fund, into a digital token that can be traded on a distributed ledger technology (DLT) network.

In the case of MMFs, tokenisation offers significant benefits, particularly in the areas of collateral management and liquidity.

Currently, investors in MMFs often face inefficiencies when using these assets as collateral. For instance, an investor holding units in an MMF must first redeem those units for cash before using the cash as collateral.

See also: Stuart Parkinson becomes Stonehage Fleming CEO

This process is slow, cumbersome, and requires the investor to forgo any yield on the asset during the transaction period. Tokenisation, however, would allow investors to pledge their MMF units directly as collateral, without needing to convert them to cash.

This would streamline the process, reduce counterparty risk, and allow investors to continue earning yields on their assets while they are being used as collateral.

Tokenisation could also help stabilise money markets during periods of economic stress. During the 2020 COVID-19 crisis, for example, many investors rushed to redeem their MMF holdings to raise cash for margin calls, leading to significant outflows and market volatility.

By enabling investors to use tokenised MMF units as collateral, tokenisation could prevent such large-scale redemptions in the future, thereby enhancing the resilience of money markets.

See also: Edinburgh Worldwide releases full-year results ahead of Saba vote

The concept of tokenised money market funds is not merely theoretical – real-world use cases are already beginning to emerge. In the UK, the Technology Working Group has endorsed the use of tokenised MMFs as collateral, and several successful pilots have been conducted in other jurisdictions.

In 2025, we expect to see tokenisation get much closer to being mainstream feature of the MMF market. As the regulatory landscape continues to evolve and the necessary technological infrastructure matures, more fund providers will begin to explore the benefits of tokenising their MMF units.

2025 and beyond

The outlook for money market funds in 2025 is one of both opportunity and challenge. While rate cuts are likely to reduce yields, the continued evolution of automation and tokenisation will provide new ways for fund providers to differentiate themselves and offer value to their clients.

With the US election concluded and Donald Trump re-elected, global markets will be closely watching for changes in trade, fiscal, and regulatory policies. These developments could reshape economic conditions and present new opportunities or challenges for MMF providers as they navigate this evolving landscape.

As the MMF sector becomes increasingly competitive, the ability to integrate advanced digital solutions will be key to success.

Yes, mistakes were inevitably made. We can say (with hindsight) that central banks sowed too many magic beans in 2020. And interest rates were kept too low through 2021, when there was already evidence for rising inflation and tighter labour markets.

But most central bank criticism was grossly unfair. In 2022, the world came face to face with an unfriendly inflationary giant for the third time in two years. There was little else central banks could have done. Indeed, in 2023 the Bank of England (BoE)’s models suggested that even with a crystal ball in 2021 telling them what shocks were coming, interest rates would have needed to break double digits to keep inflation at target. Such a move would also have pushed the unemployment rate into double digits, posing grave financial instability risks.

Oh no you didn’t …

Almost three years on from Russia invading Ukraine and we see many global risk assets at record highs, credit spreads near record tights, inflation and inflation expectations close to, or at, target, and unemployment rates close to historical lows (and at an all-time low in the eurozone). Central banks’ mandates are hitting inflation targets, protecting financial stability and/or maximising employment. Investors should be casting central bankers as heroes, not the villains of the show.

But no fable is without its moment of adversity and indeed the greatest opportunities for active fixed-income fund managers come when central banks make mistakes, when markets misinterpret their guidance, or when markets behave irrationally. Right now there’s great potential for all three.

Today we have one of the greatest market and macro consensuses ever seen. Hopes for ‘US exceptionalism’ with 3% growth rates forever are rife: long US equities and tech, long US dollar, bearish US treasuries on an outright basis and/or relative to other markets. Such heroic optimism is reminiscent of the bullish emerging versus developed market narrative from 2010-12, and that didn’t end well.

To read the rest of the column, visit the January edition of Portfolio Adviser Magazine

Blue Monday, the mythical day in January when the post-Christmas cheer has evaporated, the weather turns into a polar blast, and the resolve to stick to New Year’s resolutions is already crumbling. For some investors, there may be a sense of gloom having missed out on the full gains of the US equity market outperformance in 2024.

However, despite the potential for the US’s impressive run to be largely in the rearview mirror, there are still plenty of reasons to be cheerful in 2025.

Last year was undeniably one of US market dominance, with the S&P 500 climbing 25% versus 6% on the MSCI ACWI ex US. While some may lament their missed opportunities, it is crucial to remember it was backed up by consistent strength of the US economy.

Despite the headwinds of inflation and higher-for-longer interest rates, the US economy proved more resilient than many anticipated, driven by strong corporate earnings, a robust job market, and continued government spending.

It would be remiss not to mention AI, the buzzword that has investor’s tongues wagging, particularly in the semiconductor space. While the actual monetisation of AI products has been slower than expected or hoped, hyperscalers (large-scale data centres) continue to deploy increasing amounts of capex to ever more powerful Nvidia GPUs (a type of microprocessor that specializes in parallel computing).

How long this dynamic can persist remains an open question, but what’s undeniable  is that much of the IP related to AI, whether that be the semiconductor designs or model architecture that underlies the technology, resides in the US, turbocharging returns.

Many fantastic companies appear to have been somewhat left behind in the recent market euphoria. The common theme being that these companies often possess qualities that have stood the test of time: predictable and recurring revenue sources providing greater stability and visibility into future earnings; healthy balance sheets better equipped to weather economic downturns and invest in future growth; and companies that consistently generate high returns on the capital creating sustainable long-term value for shareholders.

The reality is that while these types of investment opportunities are objectively attractive every year, they are relatively less attractive in economic backdrops like seen in 2024. Investors don’t want stable growth in an improving economy – they want companies geared to the upside.

One example is IDEXX Laboratories, a leading provider of veterinary diagnostics and software solutions. IDEXX has consistently delivered strong revenue and earnings growth, driven by a growing pet population and increasing demand for advanced diagnostic tools. IDEXX boasts a high proportion of recurring revenues, a strong balance sheet, and a history of delivering high returns on capital.

However, last year was challenging for the companion animal industry as vet visitation trends remained subdued on the back of COVID hangover effects and consumer pressures from lingering inflationary pressures. As a result, IDEXX’s fundamental performance was lacklustre (with revenues up 6% and EPS up 12%), and the stock has de-rated to the 2022 lows on pressures that likely to be transitory. The business is not broken by any stretch of the imagination but is somewhat out of favour with investors.

Adobe, the pioneer in creative software, is another example. Over the past decade, the company has transitioned to a pure subscription-based model, creating a highly predictable and recurring revenue stream with strong economics.

While the past few years have been noisy for the company, not least following the failed attempt to acquire emerging rival Figma in 2022, the key factor driving the narrative on the stock has been the perceived impact of AI on the business.

Just over a year ago, investors were overwhelmingly positive on Adobe, with new products expected to supercharge revenue growth. Today, we find that actual monetization has been slower than expected, a common theme across many software companies.

The effect has been a derating of the stock to ~20x earnings, or a sub-market multiple. While starting valuation should only be a single factor in an investment decision-making process, Adobe remains an excellent business, and the valuation seems increasingly conducive to a decent prospective return.

So, while it’s natural to feel a tinge of FOMO when markets are surging and portfolios aren’t keeping up, it’s important to maintain a long-term perspective. Investing is a marathon, not a sprint. The losers of last year can soon become the winners of tomorrow, and vice versa.

The US market is a lot more than just the Mag 7, which continue to increasingly dominate the headlines. There are lots of interesting companies that exist further down the market cap spectrum. Focusing on fundamentals, identifying undervalued opportunities, and maintaining a consistent investment strategy are key to achieving long-term investment success.

In the farmlands of Northeast Louisiana, a new crop is taking root. For over a century, Richland Parish has been synonymous with agricultural abundance, but this month, Meta Platforms announced it was cultivating a $10bn data centre project in the region.

At four million square feet, the campus is more than twice the size of Grand Central Station. This development aligns with a boom in data centre construction, driven by the growing demands of artificial intelligence.

While AI dominates boardroom chatter, many companies are still grappling with its practical application. The real action is taking place behind the scenes. The tangible reality of AI is large data centres, with vast halls of server racks hosting cutting-edge computing power.

Data centres can be split into three building blocks: the shell, grey space, and white space. The shell encompasses land development and the building structure, while the grey space includes the electrical power and cooling systems. The white space contains the IT equipment that powers modern digital operations.

The shell

Data centre construction projects are complex and can take up to seven years before the facility is operational. The construction phase involves erecting the core building structure, installing power substations, and setting up critical infrastructure.

Meta’s Louisiana site illustrates the scale of such an undertaking, where, at its peak, the project will have 5,000 construction workers onsite.

Large-scale construction activity presents opportunities for equipment rental company United Rentals, which offers a one-stop-shop solution for project needs. By providing rental equipment such as excavators and aerial handlers, as well as site security systems including turnstiles and access control, United Rentals captures a portion of the total project cost.

Grey space

AI data centres are power-hungry. Large language models like ChatGPT consume over eight times the electricity per request compared to a typical Google search, and each new generation of AI chips demands even more power.

Access to the main grid has become a critical factor in determining the location of AI data centres. This year, Amazon purchased a campus directly adjacent to a nuclear power plant.

When a data centre is connected to the grid, electricity entering the facility is processed through switchgear and transformers. It then flows through power distribution units before ultimately supplying the facility’s cooling systems and IT infrastructure.

Both Eaton and Schneider Electric provide a range of electrical equipment designed to optimize power distribution throughout these facilities.

In the event of grid failure, backup power generators are essential for AI data centres to ensure continuous uptime and protect against data loss. These systems respond rapidly to outages, maintaining power for extended periods to support the high energy demands of AI computing.

As large language models (LLMs) continue to push the boundaries of compute power, data centres face a new challenge: heat generation. AI servers produce intense heat and must be cooled to stay running. Traditional data centres were designed like cold storage rooms, relying on industrial-scale air conditioning. However, the focus is shifting toward more targeted approaches that extract heat directly at the chip level.

Schneider Electric and Delta Electronics are leading the way in innovative cooling methods, utilizing liquid instead of air. While these techniques are still in their early stages, they are gaining traction in AI data centres due to their superior ability to dissipate heat in high-density computing environments.

Liquid cooling also reduces the energy consumption of data centres. Schneider Electric estimates that cooling systems account for 50% of a data centre’s power usage, making these techniques a valuable solution to alleviate the strain on the limited capacity of the US electricity grid.

AI paying dividends

For the companies mentioned, we anticipate that the continued demand for AI will drive strong growth in both earnings and dividends. This convergence of data centre expansion needs presents a compelling case for investors seeking exposure to the AI theme through established companies with strong dividend growth potential. Our central conviction is that the growth in dividend income dominates equity returns through time.

While the stocks are not typically considered high yield, distributing around one third of profits to shareholders, this illustrates a dividend sweetspot. Companies that strike the optimal balance between returning capital to shareholders and reinvesting profits in the business to fuel future earnings growth. When combined with long-term holding periods, shareholders in such companies are often rewarded.

In this new edition of Fund in Five, we talk to Stephen Snowden, head of fixed income at Artemis, and co-fund manager of the Artemis Corporate Bond Fund, to look at the portfolio from five angles and understand why this is a good time to invest in the asset class.

Claus Born, senior client portfolio manager, Franklin Templeton

Despite the recent correction, the valuation level of the Indian equity market remains high. The MSCI India index is trading at 24 times expected earnings, which is slightly above the level of the S&P 500 at around 23 times.

The valuation level of MSCI India is about 10-15% above the average of the past 10 years. This can be explained to a large extent by a lower cost of capital and stronger earnings growth in the Indian market. We therefore see hardly any significant overvaluation in the large-cap segment.

However, the situation is different for mid caps – this market segment currently has a valuation level that is around 100% above the 10-year average. For small caps, the valuation level is still 50% higher than the average.

In these two market segments, higher valuations were justified due to higher earnings growth.

However, we are now seeing a tendency towards an adjustment in earnings momentum. This creates the risk the valuation premiums for many small and mid caps will not be sustainable over time.

Are the outflows in India related to China’s stimulus-driven economic policy? There have certainly been investors who have tactically repositioned themselves in response to the Chinese government’s announcements.

In October, there were strong inflows into ETFs investing in Chinese equities, among other things. Until then, positioning in China had been rather weak. The announcement of economic stimulus measures has brightened investor sentiment on the country, both abroad and in China itself. But overall, the market also experienced a correction in October.

With regard to the role played by the central bank’s current policy, in October, the Indian central bank left the reference interest rate unchanged at 6.5%. Interest rate cuts are still expected over the next few quarters. The timing of these depends on how quickly seasonal inflation in food prices subsides over the next few months.

The strategist’s view

Mohammed Zaidi, investment director, Nikko Asset Management

These two markets could not be further apart in starting points and valuations. While the September-October reversal of this trend was abrupt, many things would likely need to change for sustained, long-term improvement in Chinese versus Indian equities.

India is one of the richest sources of sustainable returns and fundamental change, but finding these opportunities at a good price is the challenge. Fortunately for patient investors, such an opportunity may be emerging. Narendra Modi’s re-election to rule by coalition rather than majority likely limits his ability to implement more significant structural reforms.

Compared with other Asian economies, the Reserve Bank of India and Securities and Exchange Board of India have been proactively regulating their markets, likely curtailing growth in some areas. Additionally, the digitisation of the economy is profoundly impacting traditional distribution and brand moats –something several companies benefited from for decades.

Given its lofty starting point, some consolidation in local equity markets would be welcome. Despite some short-term reservations, India remains one of Asia’s most compelling long-term investment opportunities.

For China, our attention shifts west. US president elect Donald Trump successfully campaigned on protectionism, with China as a key target. However, assumptions this is net negative for emerging and Asian markets is uncertain. During Trump’s first term, Chinese equities outperformed the S&P 500 and all perceived China beneficiaries.

The key takeaway is Trump is not the only fundamental change. In China’s case, domestic policy is paramount. We believe Chinese equities already factor in a much higher risk premium for trade disruptions.

While China’s policy shift is towards stabilisation and addressing key financial systemic risks, sustained improvement in Chinese equities is likely contingent on greater promotion of both consumption and services – areas that would stimulate job creation, innovation and consumer confidence.

The wealth manager’s view

Kamal Warraich, head of fund research, Canaccord Wealth

In October, there was the largest monthly outflow of capital from Indian equity funds – over $10bn (£7.9bn) – since the pandemic. This was down to a combination of global and domestic factors.

Investors were taking advantage of China’s economic stimulus measures and relatively low Chinese equity valuations, which prompted a shift in capital from India to China. The Hang Seng’s price-to-earnings ratio was notably lower than India’s Nifty 50, making Chinese markets more appealing.

Another contributory factor was the overvaluation of Indian equities, with the Nifty 50 trading at high price-to-earnings multiples versus other emerging markets, meaning a sell-off was likely.

Rising US bond yields was another factor, leading to reduced expectations for aggressive Federal Reserve rate cuts, which encouraged investors to redirect funds to US assets, seen to be safer.

There have also been geopolitical concerns, with ongoing tensions in the Middle East and Ukraine. This contributes to the narrative of a cautious outlook on global growth, meaning investors want less exposure to emerging markets like India. And the picture for Indian markets has been a little bleak, with a lacklustre Indian corporate earnings season dampening investor confidence.

At Canaccord Wealth, we are still marginally overweight India and underweight China within our emerging market allocation. We do not allocate on a country-specific basis across emerging markets, which is a bottom-up result of our broader equity strategy that seeks to maintain a bias towards high-quality funds and companies.

Although China’s appeal to some foreign investors might be growing, we remain cautious. The Chinese stockmarket is still frowned upon by a lot of global investors due to the political overhang, which cannot be overstated.

Of course, we are aware of the considerable discount many Chinese companies trade on and are keeping watch.

The fund selector’s view

James Sullivan, head of partnerships, Tyndall Investment Management

China and India, the two principal protagonists of the emerging market index, are hard to ignore, and a little like that famous yeast extract, investors tend to love or hate them depending on the economic cycle.

There is little doubt that the emerging markets index is both absolutely and relatively cheap, but that is more to do with China than it is India.

India trades at 22x trailing earnings compared with the index at less than 14x. India has eased back a little in terms of valuation, but the valuation remains one that is closer to fully priced than opportunistic.

Despite the Chinese equity market appearing to offer good value, it is still too reliant on policy measures akin to a defibrillator bringing a patient back to life; until the Chinese equity market is discharged from hospital, it remains ‘touch and go’ as to whether it will be able to sustainably support itself any time soon.

All things considered, not least the direction of travel for the US dollar, for the same or better risk premium, we’d rather have any excess allocation to cheap developed markets than emerging markets at this moment in time.

This leaves us with a position that is typically ‘in line’ with our benchmarks, using a blend of active and index funds to source the exposure we require. Vanguard is currently our preferred index fund in this space, paired with broader Asia Pacific active funds such as Stewart Asia Pacific Leaders and Jupiter Asian Income where a higher yield is required.

This article first appeared in the December issue of Portfolio Adviser magazine

It is a truth universally acknowledged, that investors in possession of a good fortune must be in want of a tracker fund. But not, it seems, in the single most popular equity market—the US.

Over 12 months to the end of November, UK investors have put £21.3bn to work in Equity US mutual funds and ETFs. Given current market trends, you might expect the lion’s share of this to be going into passive vehicles. That’s not been what has happened, however. Although certain passive products have done well from the trend to US equities, in the round only £167m of that cash has gone to trackers. The rest is all active money.

See also: Morningstar: Time to look beyond the US

Before continuing, however, a slight caveat: to complicate things, if you look at London Stock Exchange-listed ETF trades, things are a little different, with November flows to the classification spiking to new highs. On this metric, net flows were almost £14bn — or 244% of the last high, which was hit in October. But this will also include flows from other exchanges on which the ETFs are listed, so is a less UK-focused view. For whatever reason, a view across the UK mutual fund and ETF landscape gives a stronger active slant.

Monthly flows to Equity US funds, active versus passive, Dec 2022-Nov 2024, £bn

Source: LSEG Lipper

As you can see from the chart, Equity US fund flows pick up from October 2023 lows, and have remained positive, except for this September.

Why this should be is harder to fathom: the US is the world’s largest, most liquid and best covered market. It should, therefore, be the hardest place to add value through active management. It seems that those with the deepest pockets think differently.

I looked at the seven active funds that have attracted £1bn-plus over the past two years, to see what distinguished them. The obvious question is, have they delivered? That’s a hard one to answer, as five of the seven have been launched within the past year. The other two haven’t been around long enough to get three-year histories. However, net returns over 12 months are within a few basis points either way of the total return for the S&P 500 over the period.

See also: Trump tariffs: A looming disaster for the global economy?

The main driver of active to passive is, of course, cost. Only one of the seven has a Total Expense Ratio above the average for Equity US passive funds, and most are substantially lower. Given their high initial minimum investment levels, which strongly indicate institutional, that’s not too surprising.

So, we can safely say that investors are not buying into the record of the fund; they are buying the asset manager and the approach. In terms of the former, one is clearly dominant (no clues, but no prizes for guessing either), there being only two management companies over the seven funds.

Then there is the approach: five out of the seven carry ‘ESG’ in the name, while the other two have well-promoted sustainability-based exclusion policies. Flows to LSEG Lipper Research’s sustainable fund list shows a £17.8bn to relevant Equity US funds over the period: less than to the net flows for active funds, and less than to the top-seven money takers, but still well ahead of conventional peers.

To what degree each of these factors — active management, company reputation and sustainability policy — are driving flows cannot be determined from the raw numbers alone, but that these three stand out from the data cannot be coincidental.

In this new edition of Fund in Five, Michele Ward, portfolio specialist, equity division at T. Rowe Price, argues US small-cap stocks are at a “once in generation” valuation level relative to large-caps.

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. 

I started in the wealth management industry in the late 1990s and one of the most significant changes has been the diversification of the workforce. Back then, the industry was male-dominated, but today, Adam & Company is moving close to a 50:50 gender split, particularly on the investment management side.

Another major change is industry consolidation. In the past, there were far more boutique firms, but now the same larger brands dominate the market. While consolidation offers brand recognition and comfort to clients, there’s a delicate balance. Firms need to be ‘big enough to matter but small enough to care’.

We’ve worked hard to maintain our brand identity, especially in a regional context. Scotland is a unique market, and what resonates here doesn’t always align with what works south of the border. Understanding and respecting these regional differences is crucial.

Q: What is the investment topic most brought up by clients/investors?

The dominance of the US market. A few key companies often referred to as the ‘magnificent seven’ have had an outsized impact on the market, which has presented both challenges and opportunities. This trend also ties into the relevance of the UK market. Historically, benchmarks were heavily UK-focused, but that has shifted significantly over time, as the UK’s market has diminished in size.

See also: Wealth manager Q&A with Nji Lorimer: The human touch

Another area of concern for clients is economic data, especially around inflation and interest rates. Since Covid, there’s been an increased obsession with these figures, which has fostered a short-term mindset in a lot of investors. It is important to guide clients away from short-term noise and encourage them to focus on longer-term themes and diversification.

Q: What piece of regulation has had the biggest impact on your day-to-day role?

Regulatory focus on consumer value has had the biggest impact on wealth management firms. Twelve years ago, it was the Retail Distribution Review and now it’s Consumer Duty. It’s a huge piece of work behind the scenes, but it provides a very useful framework against which to judge yourself. It’s a positive move to ensure clients are being supported, given the right information, getting the right product and getting good value for money. Continuing to ensure we are delivering the right client outcomes is vital.

Another regulatory area that has a big impact day to day is anti-money laundering and Know Your Customer requirements. Educating clients on the importance of these checks and finding ways to make the process more palatable is key.

Read the rest of this article in the October issue of Portfolio Adviser magazine