However, these funds came bounding back in 2024, with IA China becoming the fifth-best performing Investment Association sector of the year as returns leapt 13.8%.

This strong performance contrasted with prior years, with eleven funds making total returns upwards of 20%, and only two portfolios – Guinness China A Share and Fidelity China – reporting losses.

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

It begs the question: should investors be re-considering an allocation to China funds within their portfolios? Those with a sturdy risk appetite should certainly be eyeing up the sector, according to Chelsea Financial Services managing director Darius McDermott, who said China has some of the highest return potential on the market this year.

Bold stimulus plans from the People’s Bank of China (PBoC) are what propelled Chinese equities in 2024, and further measures to revive China’s economy and stabilise its property market are expected in the months ahead. These new stimulus announcements could again push China funds to new heights, according to McDermott.

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

Yet the readjustment last year was sharp and fast, making it easy to miss. The IA China sector shot up 20.7% in the week following the PBoC’s announcement in September before levelling out, where it has stayed ever since. Investors who want to bank on another round of stimulus plans stimulating the market should act fast, or risk being left behind, McDermott warned.

“It shot up in a very short period of time, so if you’re waiting for another stimulus announcement, be ready to pull the trigger, because it won’t wait for you,” he added.

Tariffs could extinguish hopes for growth

There is one overbearing factor that could turn China’s outlook from hopeful to grim – tariffs. Trump’s proposed 60% tariff on Chinese imports to the US could offset the positive sentiment injected by upcoming stimulus announcements and plunge China funds’ returns back into the red, according to McDermott.

See also: How will Trump’s tariffs impact markets?

Until further details are shared on the extent of tariffs and stimulus plans, the potential outcomes for China funds remains stark. Investors stand to make some high returns from the Chinese market in 2025, but could equally lose just as much, according to McDermott.

“You can’t have a low risk way of investing in China. If you’re investing in China, you are seeking superior returns, and for that you must expect superior risk,” he added.

“If Chinese equities went up 40% this year I wouldn’t be surprised – but equally if they went down 40% I also wouldn’t be surprised. When you’ve got such a wide spread of potential outcomes, it really shows the inherent volatility in that market.

See also: China’s AI breakthrough causes US tech stock tumble

“There is more stimulus to come after the tariff position is understood, and that could be a catalyst as it was last year for a sharp upward tick. But the lingering threat of course is China’s interest in Taiwan – that question mark refuses to go away.

“And with the Communist Party of China becoming more authoritarian under Xi Jinping, all those question marks still have people feeling uncomfortable about investing in the region.”

Despite investors’ hesitancy to reallocate to China, Ben Yearsley, director of Shore Financial Planning, said China funds are “cheap and fascinating”. Share prices in the region have dropped sizably amid the downturn of the past few years, presenting an appealing entry point for those with the right risk tolerance.

See also: A World Of Higher Inflation 2025

Yearsley is continuing to buy funds such as Fidelity China Special Situations and Matthews China Discovery, which are up 18.1% and 16.6% respectively over the past year.

The former is trading at a 12.7% discount to its net asset value (NAV), which could provide investors with a slight buffer should returns tumble.

Major European energy firms are poised to offer “big strategic value” as the world transitions towards decarbonisation, according to JOHCM’s Ben Leyland.

Leyland, who co-manages the JOHCM Global Opportunities fund alongside Robert Lancastle, cited UK oil giant Shell as being primed to benefit from this long-term theme over the next decade and beyond. Shell currently accounts for a 3.3% weighting in the fund, according to its December factsheet, marking it as the seventh-largest position within the 39-stock portfolio.

“What we’re really interested in is the need to invest in energy infrastructure over the next 10 to 15 years, and to move energy infrastructure broadly in a decarbonised direction,” he explained.

“It’s not about taking clear views on whether this is solar, wind, renewables or nuclear – or on whether carbon capture and storage, or hydrogen technologies, are the next big thing. These have their moments in the sun and then dissipate.”

In terms of European energy majors generally, Leyland said they tend to focus more on ‘midstream’ and ‘downstream’ opportunities as opposed to ‘upstream’. ‘Upstream’ refers to the exploration and production stages, while ‘midstream’ includes storing, processing and transporting oil, natural gas and gas liquids. The ‘downstream’ stages involve refining crude oil into fuels.

Leyland explained: “The recent action to launch US energy measures has been to double down in upstream.

“What we like, particularly when it comes to Shell, is that while they do have upstream [capabilities], the real value of the company is the midstream and downstream assets, which ultimately are going to have
big strategic value in the transitioning world.”

He added that Shell’s gas-trading division is also attractive, which was supplemented by the firm’s £47bn acquisition of gas exploration firm BG in 2015.

“There are multiple positives. The fact that LNG [liquefied natural gas] is a tradable transition fuel to help the world towards the decarbonisation agenda is one. Also, the fact Shell is paring back its downstream assets and moving its refinery hubs towards areas such as Rotterdam.

“These areas are well located in that they are industrial hubs for other hard-to-help sectors. So, steel-making or cement companies, which are going to find it very difficult to meet all of those net-zero targets – they are going to need technologies like carbon capture and storage in order to make those commitments real.”

Leyland added that Shell is one of the largest petrol station forecourt providers in the world. According to the company’s website, it has 40,000 forecourt locations across the globe as well as an additional 10,000 partner sites. In the UK, Statista figures show that Shell has the second-highest percentage of forecourts at 13.9%, second only to Esso at 15.2%.

“It’s up to [the consumer] whether they buy a petrol, diesel or electric [car], but at some stage, if we’re going to go down the EV route, we’re going to need charging stations for that. As the strong become stronger, the large will become larger. The tail of smaller companies, which cannot make that transition as effectively, is going to start atrophying.

“So this, alongside the strategic value of its midstream and downstream assets to help the energy transition, is what we think will help Shell generate strong returns.”

‘Where profit and purpose go hand in hand’

Nubank and Grab are two stocks which are tackling significant global challenges but are also set to generate strong long-term returns, according to Baillie Gifford’s Rosie Rankin.

The investment specialist director said Brazilian firm Nubank, which is held within the firm’s £1.9bn Positive Change fund, is one of the world’s largest digital banks. Currently headquartered in São Paulo, the Russell 1000 component was founded in 2013 and has more than 7,000 employees. According to a Bloomberg report in November, however, the bank’s parent firm Nu Holdings is considering moving its legal base to the UK.

“[Nubank] was founded with the intent of providing an alternative to the relatively expensive traditional Brazilian banking system,” Rankin explained. “When we first invested, it had around 58 million customers in 2021. Fast forward to today, and that’s around 100 million customers.

“It is incredible growth in a relatively short period of time, and that’s because it’s offering products and services that are really useful to micro and small enterprises.”

Seven out of 10 new jobs created in Brazil are now within micro and small enterprises, according to Rankin, meaning the ability to access affordable banking products easily is an “important driver for change”.

Similarly, an impact stock capitalising on the growing digitalisation across emerging markets is Grab, which she describes as a “southeast Asian super-app”. “Its core businesses are ride-hailing and restaurant delivery, but it does a whole range of stuff, from delivering packages and groceries to e-wallets and financial services. As a result, it has managed to build up a really impressive market share.”

Grab Holdings, which is based on One-North in Singapore, operates across Malaysia, Indonesia, Myanmar, Thailand, Vietnam, the Philippines and Cambodia, as well as its home market.

Hailed by Reuters as the biggest technology company within the south-east Asian region, the company was founded in 2012 and floated on the Nasdaq in 2021, following a SPAC merger with US investment firm Altimeter.

According to Rankin, Grab currently accounts for 70% of the entire ride-hailing market, within around 5% of adults in south-east Asia using the app at least once per month. “That means 95% don’t, so there’s huge potential there in terms of growing the number of users,” she reasoned. “And because it’s so innovative in developing technology solutions, it has been a real magnet for attracting tech talent.”

Rankin added: “Grab has many different services via its app, but they’re united by that one purpose of helping to improve lives and prosperity within south-east Asia. And so, ultimately, it’s a great example of a business where profit and purpose will go hand in hand.”

Through the lens of luxury

Investors shouldn’t give up on luxury goods stocks despite lacklustre results from the sector, according to senior analyst at Killik & Co Mark Nelson, who said the firm’s managed investment service team is taking “a defensive approach” to these types of companies.

“Luxury stocks have been getting a lot of attention of late, with softness in the market being largely driven by the continued weakness of the Chinese economy,” he explained. “The current predicament raises two big questions for investors: is there a long-term structural issue in China and, if that is not the case and it is just a cyclical downturn, when will the good times start to flow again?”

One stock the team owns shares in is Franco-Italian eyewear company EssilorLuxottica, which Nelson said combines a medical device business through its lenses, with a luxury goods one through its frames.

“[It] plays to the structural trend of the growing need for eyecare due to the increasing prevalence of eye conditions among the growing population due to changing lifestyles and demographics. Management has stated that 75% of revenues are vision care-related and therefore less discretionary in nature.”

Generally speaking, the team at Killik doesn’t think the slowing luxury demand in China is structural, despite the fact many investors are drawing comparisons between China and Japan in the 1980s. “While there are similarities such as ageing populations, there are some key differences, too,” Nelson pointed out. “For a start, there remain millions of people who have not yet reached middle-class status in China, and it is this emerging middle class that has been a key driver of luxury goods demand.

“China is an ambitious nation, with grand geopolitical goals which we believe are more likely to be achieved with a prosperous population and a growing middle class. We therefore expect the Chinese government to do whatever it takes to provide the economy with the necessary support in pursuit of these goals.”

In terms of when the performance of the luxury goods sector will turn around, the analyst said this is “much trickier to predict” but that there are “early causes for optimism”.

“China does seem to be making significant attempts to re-ignite the economy via stimulus measures. Additionally, the easing of the interest rate cycle in the developed west should be supportive of increased demand for those markets,” he reasoned.

“Finally, Trump’s election in November’s US election is being seen as a positive for the sector overall, with lower taxes and a currently buoyant stockmarket,both positive for the wealth effect and, in turn, luxury demand in the US.”

Not only this, but lower valuations in the sector could make it ripe for M&A deals, according to Nelson, with Italian luxury fashion brand Moncler allegedly interested in acquiring British fashion house Burberry.

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

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.

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

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

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

Macro backdrop

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

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

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

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

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

Performance put to the test

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

China has a knack for surprising the world, and recent developments have underscored the country’s accelerating technological capabilities.

While much of the global attention remains on the role of the US in the tech industry, China’s tech ecosystem is advancing rapidly, signaling a shift in global dynamics – even despite the 60% import tariff Trump has vowed to place on Chinese goods.

Catalysts for reflection

The proposed levy may not stunt tech’s growth in China, with Huawei recently releasing its Mate 70 Pro, a device that challenges conventional views about Chinese innovation and the global tech landscape.

Powered by HarmonyOS Next – a fully homegrown operating system – and a domestically produced chip, the Mate 70 Pro represents a significant step in China’s push for technological self-reliance. The chip, produced without reliance on Taiwan’s TSMC, demonstrates capabilities, such as near-5G performance, that were once thought to be years away for China.

Despite external pressures from US export controls, these challenges appear to have spurred China’s progress, showcasing a maturing domestic tech ecosystem. The Mate 70 Pro exemplifies China’s increasing independence in the tech space, signaling that it is no longer reliant on foreign supply chains to compete at the highest levels.

See also: How will Trump’s tariffs impact markets?

China’s drive for self-reliance extends beyond hardware to artificial intelligence. Alibaba’s Qwen, which launched QwQ, has made strides with a compact reasoning model that competes with larger counterparts.

At one-fifth the size of OpenAI’s GPT-3, QwQ demonstrates that efficiency and smaller models can be effective, challenging the idea that size directly correlates with capability. This progress shows that the gap between Chinese and American AI may not be as wide as many have assumed.

These advancements are underpinned by significant investments in education and human capital. With a substantial portion of Chinese graduates specializing in STEM fields, China has cultivated a pipeline of talent that is well-positioned to lead in industries requiring advanced technical expertise, such as AI, semiconductors, and renewable energy.

American decoupling

China’s rapid advancements, from the Mate 70 Pro to breakthroughs in AI and autonomous technologies, raise questions about the effectiveness of the American decoupling strategy.

While tariffs and restrictions aim to protect domestic industries, they risk insulating those industries from competitive forces that drive innovation.

See also: Will Trump’s return to the White House derail the green agenda?

Shielding industries from global competition could create a complacency risk, while China continues to leverage challenges as opportunities.

The broader trade landscape

Recent tariff proposals have brought trade issues into sharp focus. New proposals targeting key trading partners, including Canada, Mexico, and China, are aimed at addressing a range of global concerns.

While these tariffs might disrupt supply chains and increase costs in certain sectors, they also underscore how trade policy and tariffs continue to shape global economic interactions.

The global monetary system is another area where shifts are taking place. The growing discussion around alternative currencies by some international groups suggests that the landscape is evolving.

Tariffs and trade policies, while reinforcing the economic position of certain nations, can have ripple effects across global economies. As countries explore alternatives to traditional financial systems, the US strategy may need to consider these dynamics carefully.

Political uncertainty also remains a major headwind in Europe. In the same week as the US election, the German coalition government led by Olaf Scholz fell apart with a snap election scheduled for February 2025. It follows similar instability in France.

From a stockmarket perspective, the Stoxx Europe 600 index has also underperformed the S&P 500 by 20% this year – one of the widest gaps on record.

See also: Pictet: Why investors need to rethink their Europe allocation

The S&P 500’s outperformance has further increased its valuation premium relative to the MSCI Europe ex UK index which, according to Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, prompts the question: is the discount on European stocks justified, or should investors consider reallocating towards the undervalued opportunities on the continent?

“Despite a new US president with an ‘America first’ agenda and Europe’s sluggish recovery, there are still strong reasons to diversify equity allocations regionally,” she says. “While the S&P 500’s earnings are expected to grow strongly in 2025, European earnings forecasts are more modest. European stocks also trade at a much lower multiple on these more reasonable earnings forecasts, suggesting that a significant degree of underperformance is already factored in.

“Europe’s valuation discount is partly due to its sector composition, with fewer tech stocks compared with the US. European indices are more weighted towards industrials and commodities, which have faced challenges from global demand and a weaker Chinese economy. However, every European sector currently trades at a larger-than-average discount versus their US counterparts, reflecting general investor pessimism.

“Policy stimulus in Europe may yet surpass market expectations. While the US seems eager to impose tariffs on China, relations with Europe are likely to remain less hostile. The ECB [European Central Bank] is expected to continue easing, encouraging consumer spending, and European leaders have fiscal tools to counter aggressive trade policies. Efforts to deploy the remaining EU recovery fund may also accelerate.”

See also: BlackRock launches AI funds for European investors

Some of the headwinds facing Europe are not new. Even before Trump’s election victory, the continent was battling weak growth and a manufacturing slump, intertwined with the political uncertainty in its traditional powerhouses – France and Germany.

Meanwhile, GDP growth forecasts remain weak. According to the International Monetary Fund’s October economic outlook, Europe’s real GDP is set to grow 1.6% in 2025 – the same as in 2024.

“Recently, there has been a shift in global trade dynamics,” says Abhi Chatterjee, chief investment strategist at Dynamic Planner.

“There is a clear path of transformation of emerging market economies from a ‘manufacture and export’ model to a ‘consumer’ one, predominantly in China and India. This has attracted growing imports from manufacturers in Europe, predominantly in the luxury and automotive sectors,” he explains.

Read the rest of this article in the December 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.

The global commodity market faces an of challenges that could influence its volatility, such as new Trump presidency in the US, ongoing tensions in the Middle East, and natural disasters across the coasts of Mexico and North America.

However, there is also another factor that is probably the most underestimated one — the evolving economic deterioration of China. So why and how exactly is China influencing the commodities market, and what changes can we expect in the near future?

China’s economy has peaked

China has long been considered one of the biggest world economies, but today’s forecasts are not bright anymore — many analysts think the country’s economic peak already passed in 2021.

The main reasons behind this phenomenon is excess production capacity, a downturn in the housing market, and low consumer activity. All together, they will continue to put pressure on prices.

As a result, China’s consumer prices showed no growth in September, with a year-on-year increase of just 0.4%. Core inflation, excluding volatile energy and food prices, slipped to a modest 0.1%, marking a clear sign of a broader economic slowdown.

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

This also coincides with China’s cheap labour resources nearing exhaustion, an increase in youth unemployment, an ageing population, and may countries in Europe and the slowing down imports their imports of Chinese goods.

The Chinese government is working to manage these changes, yet the situation remains challenging. And without further stimulus, China risks falling into a prolonged period of deflation similar to Japan’s experience in the 1990s.

These incentives will most likely be further increased in order to avoid the Japanese scenario and provide a gradual slowdown in economic growth to about 3.5 to 4.5% per year over the next three to five years.

China’s economy drives commodity markets

Economic shifts in China have a direct impact on global commodities. The country remains the world’s largest importer of key resources such as oil, and any changes in its purchasing behaviour are reflected in global markets.

The volume of China’s oil imports amounts to 11 million barrels per day, which is only slightly below the level of September last year and corresponds to the average figures for the last months. Overall, import volumes remain stable.

However, the average price of imported oil in September decreased as worries about demand from China pressured market sentiment. The oil price has since surpassed $60 per barrel.

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

As for energy, it remains one of the key components of the Chinese economy. Despite the aforementioned economic hurdles, China has executed strategic adjustments to its energy sector that may soften its economic landing. From 2022 to 2024, the country managed to cut energy costs per unit of GDP by 5–15%.

The decrease occurred due to a few reasons. The first is linked to cheaper purchased resources since China mainly imports resources from countries in difficult economic conditions and offers them discounts of up to 30% relative to market prices.

Secondly, the country has modernized its own energy system, which has increased its efficiency and lowered prices.

How should investors adjust their strategies?

Faced with the problems within the Chinese economy, investors should pay attention to new opportunities in other regions and sectors.

It is worth looking at American companies, especially in promising areas such as energy, artificial intelligence, robotics, and big data. They are likely to increase their output, which also opens up new investment opportunities.

Indian and Mexican companies that can replace Chinese manufacturers in global consumer markets may also be promising. These two countries are actively developing their production facilities and becoming key alternative production centres.

At the same time, it is important to monitor the large volume of natural resources that China exports and look for alternative suppliers. This will help prepare for possible restrictions on Chinese exports or the introduction of export duties.

Some investors are already moving away from Chinese assets and switching to more reliable instruments such as gold or US bonds, with foreign direct investment in China turning negative for the first time since 1998. 

Donald Trump is heading back to the White House. His last presidency was characterised by tariffs, trade wars and tax cuts, and there is every sign that the next one will have a similar flavour.

However, clear-cut policies are thin on the ground, and markets are inevitably speculating about the likely winners and losers. We don’t have a hotline to the Oval Office, but there are areas we’ll be keeping an eye on during Trump 2.0.

US smaller companies versus the technology giants

While Trump’s laissez-faire view of business has left US markets upbeat, a closer examination of the implications of a potential tariff regime may require a more nuanced view.

M&G pointed out: “The National Federation of Independent Business (NFIB) Small Business Optimism index moved up dramatically after the 2016 election – it will be interesting to see if that is repeated. While Trump will likely impose additional tariffs, they will probably be less than that expressed while on the campaign trail. They will, however, result in retaliatory tariffs from US-affected trading partners.”

See also: How will Trump’s tariffs impact markets?

In other words, the global trading environment is going to get tougher. That will hurt international business around the world, including the US. The technology giants need international markets to thrive, to support their supply chains, and to buy their services.

At the same time, smaller, more domestic companies should be beneficiaries of reshoring and should look more competitive. Given the relative value of smaller companies versus the mega-caps, we would favour diversifying US exposure into funds such as T. Rowe Price US Smaller Companies Equity or Schroder US Mid Cap.

The energy sector

A Trump victory ushers in a new environment for energy generation, and marks a major break with Biden’s Inflation Reduction Act and support for decarbonisation.

John Chatfeild-Roberts, manager on the Jupiter Merlin Balanced Portfolio, said: “Energy features large in Trump’s economic strategy. The US is almost 100% self-sufficient in oil (it exports some grades in which it has a surplus of supply over domestic consumption, while grades it does not have in sufficient quantities have to be imported).

See also: ‘Inflationary’ and ‘volatile’ or ‘good for growth’?: Trump declares victory in 2024 US election

“Trump has said that he’s ‘gonna drill, baby, drill’. Gasoline (petrol), diesel and heating oil are fundamental to most American households and businesses: keeping the price of fuel down is perceived as the equivalent of a tax cut but more importantly, helps moderate inflation.”

This approach is likely to weigh on the renewables sector, which has been an early casualty of the Trump revival. The iShares Global Clean Energy ETF dropped almost 7% on news of the result.

Global consumer goods

The global consumer goods sector may be particularly vulnerable to any new tariff regime. Consumer goods companies selling into the US are likely to look increasingly uncompetitive, particularly where there are cheaper domestic alternatives. This is more likely for basic consumer goods than for, say, specialist semiconductors.

There are other potential weaknesses. Reuters reported data showing that a number of the packaged goods companies could be exposed by higher tariffs on Mexico. These companies have invested significant sums in their Mexican supply chains and built up significant manufacturing bases there.

Importing goods into the US could become more difficult and expensive. The impact will remain unknown until the level and structure of the new tariff regime is announced, but it could create volatility for these businesses.

What about China?

The Chinese market has fallen in the wake of Trump’s victory, having had a strong few months on the back of the government’s recent stimulus package. It is not news that Trump has China in his sights, and that tariffs are likely to be onerous.

However, this needs to be weighed against the Chinese market’s low valuations, the recent stimulus package and lower US interest rates.

Edmund Harriss, manager on the Guinness Asian Equity Income fund, said: “With the Federal Reserve in the US cutting interest rates, China now has room to cut rates without putting significant pressure on the Renminbi. One of the constraints facing policymakers for the past few years was that the Fed was hiking rates, and if China cut rates, the interest rate differential would have increased.

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

“Hot money would have left China in chase of higher yields in the US, putting pressure on China’s capital account and the Renminbi. Now this is no longer true as the Fed has started to cut rates, giving the PBOC room to follow.”

He pointed out that the government’s stimulus package extends to the stock market: “A total of CNY 800bn was set up by the People’s Bank of China, of which CNY 500bn ($71bn) is allocated for a swap facility which brokers, funds and insurance companies can use to buy stocks.

“The remaining CNY 300bn ($43bn) is to fund a re-lending facility, which listed companies and major shareholders can use to fund buybacks and stock purchases.”

The bond markets

The other key vulnerability in a Trump presidency could come from the bond market. The US treasury market has already wobbled on the news of his victory, with yields rising as inflation expectations are pushed higher.

Futures markets have started to price in fewer interest rate cuts over the next few months on the assumption that Trump’s economic measures will drive prices higher.

Economists believe that Trump’s agenda will add around $7.5trn to the existing deficit of $35.6trn. This puts the US in line for its own ‘Liz Truss’ moment. Trump has promised efficiency measures at the heart of government, saying this could be led by Elon Musk.

The US also has special privileges on its debt, thanks to the Dollar’s position as the world’s reserve currency, but it may not be able to outrun bond market maths indefinitely.

Trump isn’t a complete unknown. Investors have a pretty good idea of the direction of travel, even if the shape of his policies is not yet clear. These are the areas we’ll be watching from January 2025.

Eloise Robinson, lead manager, Columbia Threadneedle Investments

So far, it has been a positive year for equity markets on an absolute basis, Europe included. We went tactically overweight European equities towards the end of July, given attractive valuations, their cyclical nature and the expectation of falling inflation and rate cuts leading to real wage growth, hence increased consumer confidence and spending of accumulated savings.

While the environment for equities seems benign at present, looking ahead to the year-end and beyond, we see some potential headwinds, namely lofty earnings expectations for 2025, with some specific risks to Europe from a macro and geopolitical perspective.

First, and most timely, is the US presidential election. At time of writing (October 2024), Donald Trump’s odds have been improving of late and were we to see him win a second term, we would expect the proposed tariffs to weigh on European equities. That being said, a Trump victory could slightly increase the chances of a ceasefire in Ukraine, which would likely benefit European equities.

Europe is comparatively exposed to Chinese growth and the consumer. While there has recently been some stimulus measures from the Chinese government, further sustained improvement in the growth outlook for China is required to offer a meaningful support to European equities.

More broadly, the economic backdrop in Europe remains poor, with weak manufacturing data – led by Germany – and services PMIs remaining sluggish. Relative growth under performance compared with the rest of the world poses the risk of this malaise feeding through to earnings.

That said, many of these headwinds are well known by the market, leading us to believe much of this negative sentiment is already reflected in the price. In addition, the makeup of the European index is skewed towards quality companies with longer-term growth prospects. As a result, we continue to hold a small tactical overweight to European equities.

The economist’s view

Yvan Mamalet, senior economist and strategist, SG Kleinwort Hambros

European equities have markedly underperformed global markets during the past several months, held back by lacklustre corporate earnings, political uncertainty in France and a fragile economic environment, not least in Germany. Plans for Germany, France and Italy to tighten their fiscal policies next year have certainly added to the noise.

Beyond these cyclical developments, as former Italian prime ministers Mario Draghi and Enrico Letta recently highlighted in their respective reports, the EU faces a host of structural issues such as an ageing population, low productivity gains and an innovation gap with both the US and China.

Given these challenges, is it worth considering investing in European equities? We believe the answer is yes, for several reasons.

First, European equity markets are cheaper than most other major markets. Second, the European Central Bank (ECB) has embarked on an increasingly steep easing cycle: having already cut interest rates by 75 basis points, the ECB could ease by another 25 in December and possibly another 50 by March next year.

Third, the euro area economy has been flirting with a recession for a long time but may still avoid one. Even if one were to materialise, it would likely prove shallow, given the sound corporate and household balance sheets.

Lastly, European equity markets include many large multinational companies, with close to half of the sales and earnings of European stocks coming from overseas. European equities should therefore continue to benefit from the strength in the global economy – not least that of the US.

As a result, we are optimistic that European equities have the potential to perform well heading into 2025.

The fund selector’s view

James Davies, investment director, Close Brothers Asset Management

It has been difficult of late for active managers to beat the wider European indices as the best performance has come from a small number of large-cap stocks. That said, with many European companies now trading at a discount to their US peers, we do see opportunity within Europe, albeit with some caveats.

There can be reasons why European companies trade at a discount, and even with market-leading companies such as Novo Nordisk and ASML, recent share price performance shows that such stocks are not immune to disappointment.

Europe has also traditionally been a high-beta play on global growth, and with recent data in this area being mixed, Europe could still be a challenging place to invest. This cyclicality can be seen with another large European company, LVMH, which has recently disappointed.

The final reason is that when it comes to politics, Europe often struggles to get its own way; such as the surprise French parliamentary elections this year.

In short, a heavy overweight to the region would suggest either a very positive view on global growth or a desire to be highly overweight value, neither of which is true at the moment. Instead, we have a cautiously positive view, wanting exposure to different areas of the market.

Our core holding in Europe is the Liontrust European Dynamic fund, which has a disciplined investment process of equally weighted positions. We have also recently added the White Fleet Divas Eurozone Value fund, which is a Luxembourg Sicav and takes a value approach – along with a concentrated high active share. The fund has outperformed the European index and the Nasdaq since the pandemic low (to end of September 2024).

The wealth manager’s view

Nina Stanojevic, senior investment specialist, St. James’s Place

As we approach 2025, the outlook for European equities (ex UK) remains broadly positive, particularly following the ECB’s initiation of interest rate cuts. Lower rates should provide a supportive backdrop for growth and consumer spending, and European companies are well positioned to benefit. While valuations are not as low as in the UK market, European equities still seem attractive, especially versus US equities, where valuations remain elevated.

Europe’s sectoral composition adds another layer of appeal, particularly for those seeking diversification. Unlike the UK, which is more concentrated in financials and energy, Europe’s broader exposure to industrials, healthcare and consumer discretionary sectors may offer investors opportunities to benefit from a more balanced market recovery.

Historically, Europe has outperformed global equities at various points, which underscores its potential in a global portfolio context. While UK equities have had stronger historical performance, Europe’s track record remains impressive and contributes to the case for allocating capital to the region, particularly as interest rate cuts begin to ease financial conditions.

Moreover, while headline valuations for European equities may not seem particularly cheap, the underlying market offers notable dispersion. This creates an attractive environment for active management, allowing investors to capitalise on differences in sector and company performance.

With this divergence in market behaviour, skilled managers can potentially identify high-quality businesses or sectors that are poised for stronger growth in a post-rate-cut environment.

In summary, the combination of improving macroeconomic conditions, favourable relative valuations and opportunities for active stock selection supports a positive outlook for European equities as we head into 2025.

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