- Co-Head of Investment Strategy
Luxembourg, Institutional
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Investors don’t have a crystal ball but it’s fair to assume one thing for 2025: markets will once again be consumed by discussions on market concentration, inflation and valuations. A key challenge, therefore, in 2025 is this: how can investors position portfolios for bumps in the road without losing sight of longer-term opportunities?
Perhaps counterintuitively, I think the answer lies not in narrowing our focus but in expanding it. I would characterise the issues above — market concentration, inflation and valuations — as “what ifs?”. What if market concentration continues? What if inflation comes back? Will stimulus rekindle Chinese equities? Investment solutions can’t be designed with only the base case in mind; instead, they require comprehensive scenario analysis and stress testing of various “what ifs?” to understand how portfolios would respond under different conditions.
Maybe a more powerful question is “what are we missing?”. What perspectives haven’t we considered? When we build solutions in partnership with clients, we don’t just look at capital market assumptions, but we draw from across the Wellington ecosystem, bringing in expert perspectives across areas such as portfolio construction, bottom-up fundamental research and the public/private continuum.
Leaning into longevity
As an example, one opportunity and challenge that we are thinking about is longevity — the fact that people are living longer. Longevity itself used to be an outcome but now the focus is on how to enjoy a longer life. From an investment strategy perspective, this structural theme has two key implications. First, we seek to identify companies that are poised to benefit from a new focus on longevity. This includes companies that support the quality of our lives over the long term, whether from a health, fitness or financial perspective. Within this opportunity set, we categorise companies into three main areas: those revolutionising disease management, such as companies harnessing biotechnology or providing pharmaceuticals and medical devices; those taking a holistic approach to wellness, such as companies providing exercise equipment, wearable devices or functional foods; and those promoting enjoyable long lives in retirement, such as wealth managers and insurers.
Thinking differently about income
The second key implication of longer lives is about how to finance a longer life in retirement. For client solutions, this means a greater focus on generating income and also importantly, protecting on the downside. Post the quantitative-easing world, yields are, at least in a nominal sense, at better levels. However, we think it’s important to take a longer-term perspective and think strategically about how to create a diversified income stream that remains durable throughout retirement. That means looking across asset classes. For example, income-producing equity managers, when paired with other defensive managers, can potentially offer downside protection while meeting clients’ retirement needs.
What about the what ifs?
Could inflation return in 2025?
Despite having fallen from its highs in most developed markets, 2025 may see inflation pick up again, especially if tariffs and stricter immigration controls materialise under a Trump presidency. This is an important “what if?” in the short term but a longer-term perspective that shouldn’t be missed is the impact of climate change on inflation, given the amount of investment that will be needed as we adapt to extreme weather events. Integrating climate change into capital market assumptions points to a structural increase in inflation over time. One portfolio option to consider is adding asset classes or strategies that offer potential downside protection if inflation returns, such as alternatives. Higher inflation and inflation volatility across regions should lead to more dispersion between countries and companies, creating potential opportunities for dynamic and active strategies.
Are equity markets too concentrated?
Another “what if?” we are examining is market concentration. There’s a perception that equity markets are too concentrated to generate alpha. However, our team has an alternative perspective, based on our view that it’s possible to increase the breadth of the opportunity set via extension strategies, potentially allowing stock-picking skill to shine through.
What is the case for China in 2025?
China’s economy has been stuck in a rut, facing structural challenges that warrant painful reform. Relative to the pre-COVID trend, the domestic private sector is struggling most, with retail growth sluggish and property plummeting (Figure 1). Our market-efficiency framework points to idiosyncratic opportunities within China but we need to see evidence that structural challenges are being dealt with before we get excited about the overall market. The equity market has been unlike others in emerging markets in that improvements in GDP have not translated into growth in earnings, which has hurt stock returns in the last decade.
Policymakers have introduced significant stimulus this year, in an attempt to both address structural economic challenges as well as to improve poor sentiment.
Figure 1
Given that components of the stimulus were specifically designed to support markets (for example, providing loans for stock buybacks), sentiment improved immediately, bolstering equity prices in the short term. However, further government commitment is still needed to boost private demand and deal with longer-term challenges. Longer term, we still think China has potential for innovation and growth in areas such as digital connectivity and environmental consciousness, especially in areas that are aligned with government priorities.
In 2025, while we will all be focusing on market concentration, inflation and valuations, we must also consider structural themes such as longevity, in order to build resilient portfolios that can adapt to and capitalise on long-term shifts and evolving market conditions.
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Monthly Market Review — October 2024
A monthly update on equity, fixed income, currency, and commodity markets.
By
Brett Hinds
Jameson Dunn