The ‘red-flagged’ strategies were the HL Select UK Income, HL Multi-manager UK Growth, HL Emerging Markets and the HL Global Bond funds. The Select UK Income and Multi Manager UK Growth funds were said to represent value overall but require additional focus. The £150m Emerging Markets and £667m Global Bond strategy, however, were found to offer poor value overall.

Following last year’s report, the investment platform overhauled the funds that were flagged.

See also: Global markets fall as Trump tariffs spark trade war concerns

On the HL Global Bond fund, the firm said that changes were being made to improve the offering with fees being reduced by 10%. The strategy has returned 2.91% over five years, according to FE Fundinfo data, lagging the IA Sterling Strategic Bond sector average of 7.37%.

While HL said that manager selection had contributed positively over the past year, the global allocation was a headwind against a peer group with a predominantly biased towards UK bonds.

Similarly, HL has reduced fees on its emerging markets fund by 11 basis points. After the fund was flagged in last year’s report, it was repositioned towards a more disciplined approach with a focus on Emerging Markets rather than Asia & Emerging Markets. HL also removed three managers and added one over the course of 2024. The fund was in the third quartile of performers within the IA Global Emerging Markets sector over five years, according to FE Fundinfo.

See also: PA Live A World Of Higher Inflation 2025

Hargreaves Lansdown CO Toby Vaughan said: “Following a period of developments across our proposition and investment processes, the focus over the past year has been on continual improvement in both, as well as the delivery of results in the form of performance.

“The trends have been positive with the majority of the multi-manager funds improving their performance and outperforming comparators over the past year.”

Last year, corporate bonds achieved stable returns and rocketed in popularity, following expectations of falling interest rates across most developed economies. As such, the asset class is entering 2025 at tighter spreads than markets have seen for some time, but also with more attractive yields as interest rates reached highs not seen in several years.

The performance of government bonds has been more volatile, according to industry commentators, and looks set to remain so. The election of Donald Trump as US president, combined with weaker economies across western Europe, means that while interest rate cuts are virtually inevitable, the timing and scale of them is relatively unknown.

Iain Buckle, head of UK fixed income at Aegon Asset Management, says: “We expect bond markets to remain volatile in 2025. The market currently expects a further 75 basis points of cuts from the US Federal Reserve over the next 12 months. The broader US economy still seems robust, however, and those 75 basis points of expected cuts could look optimistic if the labour market remains resilient.

“The political backdrop in the US will also drive volatility, given the market assumes a Trump presidency will lead to looser fiscal policy and higher inflation. We will learn more as he takes office, and the reality may not be what the market has implied. But it’s likely the style of his presidency will only add to the uncertainty and volatility in markets.”

David Knee, deputy CIO of fixed income at M&G Investments, agrees that Trump’s election will increase volatility across markets, as investors anticipate how his second administration pans out.

“The first Trump presidency showed what Trump said he would do and what he actually did was very different,” he reasons. “Bond markets will be watching for key policies such as tariffs, tax and immigration, which could potentially reignite inflation and limit the ability of the Fed to act, as well as add to already growing deficits.”

Over in Europe, Buckle says the outlook is “slightly more certain”. “Core European economies have been struggling for some time, negatively impacted by a weak Chinese consumer and growing competition from within China itself.

“We expect the European Central Bank (ECB) to continue to cut rates, with 125 basis points of cuts expected by the end of the year. It would take a further deterioration in the outlook for the market to price in further cuts, but that is certainly a possibility as we learn more about US tariffs early in 2025.”

To read more on the outlook for government bonds, credit, equities, emerging markets consolidation and Consumer Duty, visit the January edition of Portfolio Adviser Magazine

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

Waistell brings 15 years of portfolio management experience to the role. Most recently, she was with Polar Capital where she co-managed the quality-growth EM fund, which grew from €167m to €1.5bn during her tenure.

See also: Carmignac enters private markets with launch of Article 8 PE strategy

“Carmignac has a great reputation in emerging market investing, having been an early pioneer of the asset class and I look forward to joining its industry-leading team. 2025 is set to be an exciting but volatile year, with the repercussions of monetary policy normalisation in emerging markets and a second mandate for Donald Trump.

“I am more convinced than ever that an active approach, with a clear consistent process that focuses on deep company analysis and cuts through noise, is the optimum way to identify emerging market investment opportunities and avoid potential pitfalls.”

See also: Brooks Macdonald and Rathbones make distribution hires

Li-Labbé leaves the firm to pursue a career “outside portfolio management”, according to Carmignac. She spent over 13 years with Carmignac, joining the company in 2011.

The Article 9 Carmignac EM strategy was managed by Li-Labbé alongside Xavier Hovasse, who will remain with the fund. In the past five years, it has returned 35.36%, compared to a sector average 12.78%.

But as US equites leap to new heights, some asset managers grow concerned that a bubble is forming and better opportunities can be found in cheaper markets elsewhere.

Share prices in the US are trading at a lofty price-to-earnings ratio of 26.3 (as of 30 September), which is considerably above some other equity markets around the globe.

“The most attractive developed market”

It is for this reason that Morningstar’s chief research and investment officer Dan Kemp is taking some focus away from the steep US equity prices and looking towards the relatively undervalued European market.

“After their rally earlier this year, the valuations for US stocks now appear expensive based on our models and top-down expected return estimates,” he said. “By contrast, Europe, and in particular the UK, stands out as a region where investors can achieve better risk-adjusted returns.”

The region’s rising GDP, falling inflation, and lowering interest rates makes it “the most attractive developed market” to invest in currently, according to Kemp.

He estimates that European equities are trading at a 5% discount to their fair value, which is “not cheap, but equally not expensive given where markets have traded over the past few years”.

To find truly cheap opportunities in Europe, Kemp said investors should look to small-cap companies, which are trading at a hefty 40% discount to their fair value estimate. This is where the “significantly greater value” in Europe lies, he said.

Maximising income

Fund managers chasing high returns in the US has also slashed the level of income that investors can earn on their savings, according to Van Lanschot Kempen’s head of the dividend and value team Joris Franssen.

He said 70% of global income funds now have exposure to the magnificent seven stocks – none of which offer a dividend yield above 1%.

“Over the past five years or so, the median yield of global dividend funds has taken a notable tumble, partly due to the fact that many strategies have shifted towards the US,” Franssen added.

“As equity markets reach extreme levels of market concentration, diversification becomes even more important. Valuations are currently more attractive, and yields are higher, outside the well-known US large-cap names.”

To find higher yields and lower prices, Franssen has looked past the US and towards Asian equity markets for new opportunities.

He highlighted Japan and South Korea as two hotspots in the region that are “unlocking significant value” for investors, namely due to the corporate governance reforms that are transforming their equity markets.

Heightened demand in emerging markets

The chasm between US valuations versus the rest of the world is prevalent across different asset classes too. Emily Foshag, manager of Principal Asset Management’s Global Sustainable Listed Infrastructure fund, said she has been allocating away from the US and towards more affordable holdings across the globe within her sector.

“Our view of relative valuation is generally driving us to express a preference for investments outside the US,” Foshag added. “We see infrastructure companies with comparable or even stronger fundamentals trading at material discounts to their US counterparts.”

Foshag underlined emerging markets as not only an area with lower starting valuations, but also much higher growth opportunities.

Rapid urbanisation, population growth, and government-led initiatives to improve infrastructure makes the structural trends there all the greater than developed countries.

Foshag added: “We are seeing meaningful valuation discounts in places like China or Latin America that have the potential to revert over the medium-term.

“More generally, a globally diversified infrastructure portfolio not only reduces reliance on US market performance but also provides a return opportunity that historically exhibits lower correlation to broader global equities.”

South Korea’s transition from a manufacturer of durable consumer electronics to a frontrunner in new-age tech such as semiconductors and electric vehicle batteries has presented itself as a ripe opportunity for stockpickers, according to Franklin Templeton’s Chetan Sehgal.

Sehgal, portfolio manager of the Templeton Emerging Markets investment trust, said the country is “at the forefront of innovation”, boasting the highest per-capita patent filings globally. He added that South Korea is also “one of the very few markets globally where the internet ecosystem is dominated by domestic companies”.

One stock held by the trust which is capitalising on this trend is multinational insurance company Samsung Life. Founded in 1957, Sehgal said it is now the largest life insurance company in South Korea.

“With a customer base exceeding 10 million, Samsung Life is the undisputed leader in its home market – a dominant position that acts as a formidable barrier to entry.

“Beyond South Korea, the company has strategically expanded its footprint across eight countries in Asia, the US and Europe. This international growth underscores the company’s ambitions to increase market share globally.”

While Samsung Life suffered a downturn during the mid-2000s due to a range of guaranteed return policies amid a low-interest rate environment, Sehgal said recent product development and diversification initiatives have sparked “a significant turnaround” in share price performance. He added that higher interest rates have also bolstered the profitability of existing products.

“The strategic shift toward health-related products has been particularly successful, with health and wellness insurance, pension plans and customised annuity products forming part of its diversified portfolio – all under a trusted Samsung Life brand name,” he said.

“Moreover, the company is embracing digital and technological innovation. The adoption of cutting-edge virtual reality tools enhances the customer experience and delivers services cost-efficiently. The company is also exploring ways to convert some of its 40,000 office-based staff into mobile operators, further streamlining operations while improving customers service options.”

Elsewhere, Sehgal is favourable on the prospects for SK Hynix, which manufactures memory components for mobile phones, data storage and memory cards. He said it is currently the world’s second-largest chipmaker and the sixth-largest semiconductor globally, with manufacturing facilities in Korea, China, Taiwan and the US.

“The memory sector is currently experiencing an upturn, fuelled by the surging demand for high bandwidth memory, particularly in AI applications,” the manager explained. “SK Hynix has seized a leadership position in this latest generation of high-bandwidth memory market, securing key supply agreements with industry leaders.”

And, as memory-related technology improves, Sehgal pointed out that manufacturing processes become more intricate, which will reduce product supply.

“Consequently, prices in this historically cyclical industry are rising, boding well for the leaders producing high-quality memory commodities,” he said.

“We maintain our belief that memory companies will significantly benefit from the AI revolution, with SK Hynix leading the high-bandwidth memory segment crucial for AI applications, exerting a significant influence on the market.”

abrdn looks beyond TSMC in Taiwan

While small-cap and tech stocks have not been traditional hunting grounds for income investors, managers of the £344m abrdn Asian Income fund identify strong opportunity sets in both.

Roughly 15% of the investment trust’s net asset value is in smaller companies, while tech is its largest sector overweight.

“It might seem weird for an income fund from a European perspective to see so much in tech,” co-manager Yoojeong Oh said, “but we have a lot of good quality tech companies in Asia that are not only net cash in their balance sheet, but also offering great growth because they have dominant market share in the businesses they are in.”

It is difficult to find an Asia portfolio that isn’t invested in market-leading semiconductor business TSMC (Taiwan Semiconductor Manufacturing Company), and while abrdn Asian Income is no exception, Oh argues the Taiwanese market offers opportunities in tech beyond its largest stock.

TSMC is abrdn Asian Income’s largest position by some way, making up 12% of the portfolio at the end of August. However, the trust also invests in Taiwanese stocks such as Taiwan Mobile and Sunonwealth.

“Sunonwealth is a Taiwanese small-cap company which makes the cooling fans that go into data centres. With the growth of information processing and machine learning, such as ChatGPT, the world needs more and more data centres, which then need more and more cooling,” Oh said.

“Sunonwealth is one of three companies globally that can produce these specialised cooling fans. They have a net cash balance sheet and a good ability to pay dividends.”

“I think that’s a good example of a company that starts in that small-cap space, but perhaps in a few years will be in the mid-cap bucket.

“We are constantly trying to refresh that small-cap portion of the fund to make sure we keep holding those growers.”

On small caps, Oh said it’s an “interesting place” to find new ideas. “Even the small-cap companies we invest in contribute to both net asset value growth and dividend yield.

“Because Asia went through a debt crisis in the late-1990s, there are actually a lot of good mid-cap companies in the region that are family-owned, very conservative and very protective of their balance sheets. We get good quality mid-cap companies that pay us that dividend and hold resilient balance sheets.”

She added that generally speaking, balance sheets in Asia are much less leveraged than in US and in Europe.

“That provides good flexibility in terms of the safety of dividends going forwards. Because we have these stronger balance sheets, we have good free cashflow-generative companies and that is across the market cap spectrum.

“We are really trying to play into that theme of accessing the growth in Asia, but also accessing that growing dividend story as well.”

abrdn Asian Income currently trades at a 13.2% discount to NAV, according to the Association of Investment Companies, and has a dividend yield of 5.29%.

Could Turkey be the next big EM story?

With poor performance from the Chinese equity market weighing on returns for typical ‘one-stop shop’ emerging market strategies over the past few years, managers of the Barings Emerging EMEA Opportunities investment trust believe investors are viewing their EM exposure through a more regional lens.

The trust aims to generate positive alpha by offering exposure to smaller names in typical emerging market benchmarks, in eastern Europe, Africa and the Middle East.

“New shareholders in the trust, particularly institutional, are looking at emerging markets from a regional perspective again versus globally. That’s something we’ve seen for the past two years now,” said co-manager Adnan El-Araby.

According to El-Araby and fellow manager Matthias Siller, one of the regions that could benefit from this realignment is Turkey.

“We think there is a potential opportunity for Turkey to come back into the fold as a credible emerging market investment,” El-Araby said.

The country is experiencing a painful period for the local economy as it navigates the trade-off between job creation and bringing down rampant inflation, added Siller.

“We’ve taken our foot off the gas for now to wait and see, because this is the ultimate test for the political willingness to see a more orthodox monetary policy. In the past, Turkey has had a super-expansionary monetary and fiscal policy.

“We see a lot of opportunities there at the political, stock and sector level. The stock exchange itself is one of the most liquid in the world, so we also attracted by that.

“I think it will become a much bigger story in 2025 from an EM perspective.”

An example of the trust’s Turkey exposure can be found in local discount supermarket Bim. Siller said: “It’s a local name, it’s not like Lidl coming to Turkey and being very successful. Bim has been so successful that Lidl doesn’t come to Turkey. It was set up from scratch and built into the largest supermarket operator in Turkey with more than 10,000 stores and still growing. It’s a price leader, reinvesting margins into prices and not leaving any oxygen for the competition. It’s also been instrumental in driving inflation down.”

The trust’s investment process places emphasis on governance and the strength of management teams to be able to navigate the volatility that comes with emerging markets.

“[Bim] knows how to operate in Turkey,” El-Araby added. “It has manoeuvred not only the economic volatility we’ve seen in the past 10 years, but also the political volatility. It has managed its balance sheet and bought back shares; it also pays a dividend.

“It can communicate to the market. I’ve been looking at them for 15 years. Matthias has known them for over 20 years, so it’s almost exactly what we look for in a company.”

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

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.

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.

China’s latest Ministry of Finance press conference may have lacked specific measures to directly support consumption, but the unexpectedly large size of China’s fiscal stimulus package has done a great deal to boost investor confidence in the struggling Chinese economy.

The measures announced, including new tools for China’s central bank to help companies buy back shares using refinanced bank loans, prompted a rush into Chinese equities in September. Stocks on the Shanghai exchange rose, with turnover reaching $101bn.

Initially, the exchange experienced glitches in order processing and delays, before stocks in China finally recorded their best day in 16 years on the last day of September.

See also: Is China at a turning point, or will it disappoint yet again?

Following China’s latest interest rate cuts, we now see the world’s second-largest economy potentially taking a more targeted route to economic revival. The country’s renewed efforts are designed to help securities firms, insurers and other institutional investors raise funds by clearing their balance sheets.

We view the immediate market reaction to these moves as a strong indicator of not only investors’ appetite for value, but also a sense of FOMO (fear of missing out) that we believe could continue to fuel the market rally.

Short covering may also have played a role in the recent rally. Traders who have suffered heavy losses may be unwilling or unable to bet against the government again anytime soon, which could lend stability to the current rally.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

However, with weak domestic consumption, a troubled property sector and other structural problems still weighing on the Chinese economy, quick fixes seem unrealistic. There is a long way to go, still.

That said, the signal that these measures are sending to the market is the strongest it has been in at least three years and has laid the foundation for a better perception of the Chinese equity market.

External geopolitical risks has created uncertainty, especially in the run-up to the US presidential elections. Talk of a possible trade war between the US and China also continues.

See also: Macro matters: Why managers are buying China again

Yet investors may take some comfort from the fact that, as in recent decades, the US is still likely to have a divided Congress – which may limit far-reaching changes to legislation.

All of this is not to say that we are not encouraged by the Chinese leadership’s new determination to stabilise markets. The measures have already pushed emerging market equities to highs not seen in more than two years.

The Brazilian and South Korean stock markets, both of which hit their year-to-date lows in August, have since rebounded. The same is true for the Mexican market, where equities rebounded after a dip in early September.

See also: Fairview’s Yearsley: China becomes ‘story of September’

However, this may be a reminder that there are long-term global market opportunities.

While the market focus this week may be on China, and while the long-term case for an allocation to Chinese equities has likely improved with the recent announcements, we cannot overstate the importance of diversification.

Asia and emerging Asia is becoming increasingly bifurcated, a trend we believe will continue. With the global interest rate cycle, the US election and geopolitical fragmentation all adding layers of complexity, we believe that investors should prioritise flexibility and agility in this economic climate.

See also: Fidelity’s Dale Nicholls remains ‘cautiously optimistic’ on China

We see China’s concerted comeback effort in global markets as a positive signal for the country and the broader region. Long-term trends such as technology leadership, attractive valuations and the expansion of production capacity offer ample opportunities for investors along the risk spectrum.

The road ahead will certainly not be smooth, but the biggest risk for investors could indeed be to ignore Asian markets in their allocation decisions.

US dollar bonds have long been the cornerstone of global bond indices, representing nearly 40% of the Bloomberg Global Aggregate index by duration contribution. This dominance is largely due to the substantial issuance by the US government and US-based corporations.

But the inclusion of Chinese yuan-denominated bonds in 2019 marked a pivotal shift in the index’s composition. These bonds now constitute around 10% of the market, positioning them to potentially overtake Japan as the third-largest entity in the near future.

Given that China and Japan together account for a quarter of the global bond market duration, a fund with no exposure to these markets but maintaining a 5-year duration would be considered neutral relative to the rest of the index. This is an important consideration, especially when we see European funds extending their duration up to ten years in Western markets, while asserting they are following the index.

The end of DM bonds proxies for Japan and China?

For the past couple of decades, many investors have safely ignored Japanese bonds (JGBs) due to ultra-low yields and central bank control. The low “beta” of JGBs meant that bond managers could replicate Japan exposure with smaller Western markets when needed.

In contrast, China divides investors. Many remain wary of the protections available to bond holders in times of distress. Recent property market woes have not helped. Even bonds within the index have faced liquidity and transparency challenges.

See also: Hidden gems: Five below-radar funds in the global EM sector

However, with these correlations now shifting, what does it mean for bond investors?

Inflation denial in Japan

Japanese inflation has exceeded the central bank’s target for some time now. To put this into perspective, the latest data shows Japan CPI at 3% compared to headline US CPI of 2.5%. Unusually, Japanese inflation has outpaced US inflation in recent years.

With the US now cutting interest rates, bonds have been rallying. However a US Treasury investor now receives 1.5% per annum above inflation whereas a Japanese bond investor receives 1.5% less inflation. This divergence highlights the changing economic landscape and implications for bond investors.

It is worth noting that the Bank of Japan has kept yields low and inflation high to manage Japan’s huge debt burden, reflecting its lack of independence and role as a direct government agent – something it has been trying to do for more than two decades.

See also: Japan election uncertainty prompts carry trade concerns

Despite the inflation problem and the lack of value for bond investors, the Bank of Japan refrained from raising rates post pandemic, only making minor adjustments to cash rates. Consequently, avoiding Japanese bonds based on pure value and fundamentals, has been a straightforward decision.

Recently, the ruling LDP elected a new leader, Shigeru Ishida, a supporter of hikes. Bond markets rallied before the vote, anticipating no immediate increases. After Ishida’s victory, the Yen strengthened and JGBs fell slightly, hinting at potential future changes. This aligns with our view.

Shelter with not enough value in China

Many investors shy away from China. Information flow is light and liquidity questionable compared with other major markets. For example, Bloomberg quotes a bid/offer spread on ten year Chinese bonds as high as 0.5%. Compare that to Gilts or US Treasuries where there is close to zero bid/offer.

Ignoring all that, many find no value basis for buying Chinese bonds. The Chinese economy has been struggling. The Politburo is targeting a 5% annual growth rate which seems unlikely. Bond markets have rallied to unprecedented levels. The yield on 10-year Chinese bonds recently touched 2%.

But many domestic investors have been so worried about the stock market they sought shelter in bonds. Some bought bonds on a trading basis, expecting the PBOC to slash interest rates as inflation remained barely positive.

See also: Are fixed income funds the panacea, or are they too expensive?

Instead, the authorities unveiled a package of fiscal measures designed to improve the housing market and feed directly into consumer confidence and consumption. The presumption that interest rates would be cut aggressively proved false. And of course, all that stimulus led equity markets higher meaning the chance of making more from the bond than the equity market faded.

Markets saw record one day losses at the end of September for holders of long maturity Chinese bonds. Even 10- yields rose by the most in several years, wiping out several months’ worth of gain.

As domestic buyers turn their attention back to the equity market and international investors remain unconvinced yields have risen enough, the short term outlook for Chinese bonds does not look good.

Irrespective of politics, the lack of value suggests they are best avoided.

Better bond opportunities elsewhere

Buying Japanese or Chinese sovereign debt is hard to justify at current levels. Japan is either embarking on a path of monetary tightening or faces rising yields as the Bank of Japan is deemed further behind the curve. while Chinese yields are at levels never seen before with a wave of fiscal stimulus hitting the economy.

Bond holders should brace themselves for a rocky ride with these assets. For now, we prefer to focus on core bond opportunities elsewhere.

It a “strategic market” that the firm was keen to get exposure to given its fast-growing equirty market, which is currently valued at $2.8trn, according to global advisory service EVP Adam Spector.

Saudia Arbia also has the largest and fastest-growing bond market among Golf Cooperation Countries, hence its launch of the the Franklin Saudi Arabia Bond fund, which will invest in debt securities and obligations issued by government and corporate entities in the region.

It will be managed by the firm’s chief investment officer for fixed income, Mohieddine Kronfol, who said: “Despite this growth, and increasing share of emerging market issuance, debt metrics remain robust and sustainable, on a relative and absolute basis, so that investing in Saudi bonds can potentially deliver attractive returns with valuable diversification benefits.”

Its second product, the Franklin FTSE Saudi Arabia UCITS ETF, will track the FTSE Saudi Arabia 30/18 Capped index, which consists of 64 large and mid-cap Saudi Arabian equities. Dina Ting and Lorenzo Crosato will managed the fund.

Saudi stocks were only available to local investors until it was opened to foreign capital in 2015. Since then it has become over 4% of the FTSE Emerging Market index.

Spector anticipates further growth potential ahead for the market beyond the oil exports that have increased its wealth, accounting for 25% of the world’s conventional reserves.

“Through its Vision 2030 plan, the country continues to take steps to improve the business environment and diversify its economy away from oil and attract foreign investments,” he said.

“As one of the fastest growing economies globally, this is a strategic market for us, and we are excited to offer international investors the opportunity to participate in Saudi Arabia’s growth story.”

Nandita Sahgal, James Kinsbrook and Raviraj Salecha’s investment strategy centres on mid-market private infrastructure companies that are driving the energy transition in emerging markets.

Redwheel CEO Tord Stallvik (pictured) noted that a lot of asset managers have shown interest in profiting from the decarbonising and electrification of emerging markets, but he was attracted to the new team’s unique approach to a popular investment theme.

They mostly specialise in South Asian markets such as India, the Philippines and Vietnam, unlike most funds in the space which have large allocations to places like China, which have become overly competitive and difficult for new entrants to participate in.

See also: Is the ECB ‘behind the curve’ with ‘hesitant’ interest rate cut?

Plus, the team’s focus on mid-cap companies gives the firm exposure to an overlooked area of the market not captured by most of its peers, according to Stallvik.

“Nandita and her team are really focused on the mid-market space, which is too small for the big guys to spend time on – but it’s the biggest opportunity,” he said.

“Most projects throughout emerging markets aren’t going to be mega projects, they’ll be mid-sized projects, and it’s trillions that need to be spent here. Only the tip of the iceberg has happened so far, so it’s a huge opportunity.”

A natural next step

Rather than chasing popular investment themes, Redwheel has often developed its specialty in niches such as sustainability and emerging markets.

So when Sahgal and her team came along with a strategy that combined the two, it seemed like the natural next step Stallvik was searching for.

“In a more competitive environment, you need to focus on the things you’re really good at,” he said. “If you waste time on things you’re not good at, it takes away attention and it takes resources, so you can’t afford to do that. So it’s both opportunity and necessity that’s driving our focus.

“There’s definitely challenges in the industry, like the fee and cost pressures related to passives, that aren’t going away, but I think the world needs investment strategies that give you something different and help you diversify your portfolio. You need to be picking areas where you have real competitive advantage.”

See also: Amundi CIO Vincent Mortier on tariffs: ‘There are always winners and losers…but the losers outweigh the winners’

Stallvik had considered launching strategies in sectors such as technology that have driven equity market returns for many years, but found that they were very difficult to get a foothold in.

With so many players investing in the space, it is challenging for a new entrant to bring something new to the table. Stallvik concluded that it made more sense to build a dominant positions in niche spaces.

“A few years ago, we thought about how we didn’t have an investment team focused on the kind of mega-cap tech trade that has driven so much of people’s interest in the last decade. And whilst it would have been great to have that – because clearly many people have done very well in that space – we would have been difficult to compete against very large competitors, and we also felt we’d be a bit late to the party,” he explained.

“So we left that aside and thought about how we could provide a real opportunity over the next few decades, and we really felt that was in more thematically specific sustainable strategies. I feel very confident having a business that’s focused away from that and on more specific areas.”

‘Harder than ever to start a new asset management business’

However, Stallvik said there was a time when enterprising managers with an effective strategy such as Sahgal would rather have set up their own boutique. Yet stifling regulation on new asset managers has made it too challenging to go it alone.

“It’s harder now to start a new asset management business than it’s ever been,” Stallvik said. “The ingredients you need to do it well are so much more extensive than it used to be.

“You still have a lot boutiques in the US where regulation is lighter, but in the UK and Europe, it’s very hard and costs a lot of money to run an asset management business because of the enormous amount of regulation.”

Most regulation is aimed at large financial institutions with big balance sheets, but there is no distinction in the rules for smaller firms. Start-up boutique asset managers therefore have some very high hurdles to jump before they even begin operating.

With such demanding requirements to even pass the starting line, innovative early-stage asset managers instead seek out the support of established firms such as Redwheel, according to Stallvik.

See also: Could fixed income markets suffer another double-digit drawdown?

“Some of it is well meaning, so I don’t think it’s necessarily all bad, but it does mean that in order to be operating in these jurisdictions, you need to be able to invest more in that support infrastructure,” he said.

“It does create a bit of an opportunity for us though, because we provide a home for people who would ideally like to set up themselves, but recognise that doing it completely on their own is difficult. So we give them the autonomy to run their own investment businesses, but just in partnership with Redwheel.”

In fact, Stallvik prefers teams who have already tried to set themselves up independently and understand the challenges in doing so. Without the administrative distractions involved with running  a business, they can focus on their primary skill set – running a successful portfolio.

“A key ingredient we look for is teams that have developed an appreciation for how hard it is to do it completely on your own,” Stallvik added.

“Ideally, we want people who are real entrepreneurs, who want to have their own business, but appreciate that if you’re an investor with a clear investment strategy, the best thing for you is to actually focus all your energy on doing – not to spend half your day talking to your head of departments about how the business itself should be run.”

Where to next?

Looking at markets today, Stallvik sees some of the greatest investment opportunities in global smaller companies. They are overlooked, require a specialist knowledge, and have a sizable runway for growth – he simply hasn’t found the right team he wants to take on yet.

“We’re looking at areas where it’s more difficult for passives to work well, and one very obvious area is smaller companies,” Stallvik said. “There are thousands of them around the world that are not getting much research coverage and not getting as much attention, so it’s a market which is far less efficient.

See also: ‘SDR implementation is far more challenging than we ever anticipated’

“We’ve spoken a lot about introducing a global small-cap strategy and we’ve talked to lots of people about that, but when we bring in a new team to join us, they need to have a very clearly identified investment process and position  in the market.

“Because every time we do something like this, we’re essentially starting a new business. So will we one day have a small-cap capability? That’s very possible. But it has to be the right team.”