New positions have been taken in the Premier Miton US Opportunities fund and two exchange-traded funds (ETFs), the iShares Up to Years Index-Linked Gilt Index and iShares Up To 10 Years Gilts Index.

“There is a huge amount of market noise at the moment around the AI boom, and the surging ‘Magnificent Seven’ stocks that are driving US, and even global indices higher,” said James Burns, lead manager of the Evelyn Partners Core MPS.

“With positions already benefiting from this trend, we believe there is value in seeking exposure to other areas of the US stockmarket where gains could broaden out from big tech,” he added.

See also: Pacific, Albemarle and Hymans Robertson model portfolios added to Parmenion platform

The increase in exposure to the US was done at the expense of UK equities, and to a lesser degree, Europe, which were both trimmed back.

In terms of fixed income, Burns said that since October 2022 the MPS had steadily been increasing its weighting to government bonds across the risk spectrums and this move continued in the latest rebalancing.

“We see short-to-medium dated gilts as the area of the bond market that offers the best value at the moment, so within fixed income we’re seeking more exposure there,” he said.

To fund this move, the Core MPS trimmed back its allocation to US government conventional and index-linked bonds, although Burns added they remain “dominant” positions within that segment of the portfolios.

Corporate bond positions were also reduced, as Burns said credit spreads have continued to tighten to levels which meant their protection characteristics have “become less obvious”.

“Where we retain exposure, it is significantly skewed to short-dated bonds that should fare relatively well in the event of any downturn,” he said.

The five global portfolios will target ‘best-in-class’ passive ESG-rated equities and bonds. Each model’s equity allocation will vary from 100% to 20% and will invest across a range of regional equity funds and/or two fixed income funds.

The equity element will invest in the Amundi SRI PAB equity funds, which track MSCI SRI Filtered PAB regional indices. These focus on the top 25% ESG-rated companies relative to their sector peers and have a wide range of systematic environmental- and social-based exclusions – for example, they exclude companies generating revenue from thermal coal mining or oil and gas extraction.

These indices also align with the EU Paris-Aligned Benchmark (PAB) regulation minimum requirements, including: a reduction in carbon intensity by 50%, compared to the underlying investment universe; and a reduction in carbon intensity by 7% on an annualised basis.

Meanwhile, the SRI fixed income element invests in two bond funds managed by Northern Trust Asset Management, which track Solactive Global Bond ESG Climate indices. These are focused on a global investment grade bond universe that is screened for ESG scores and carbon emissions, including targeting a 50% reduction in corporate bond carbon intensity compared to the parent index. EBI added risk in the SRI bond element is reduced by blending the two fixed income funds to target a shorter duration than the wider market.

See also: Pacific, Albemarle and Hymans Robertson model portfolios added to Parmenion platform

Jonathan Griffiths (pictured), investment product manager at EBI, said: “We know investors seek to invest in line with their values, while also seeking competitively priced investment solutions. With the launch of the SRI portfolios, we are in the sweet spot where these two elements align. Providing enhanced ESG screening, and market-leading equity exposure aligned with the EU Paris-Aligned Benchmark minimum requirements, these portfolios are an exciting addition to our product suite and the wider MPS space.”

Ashkan Daghestani, head of ETF, indexing, and smart beta sales for UK & Ireland at Amundi, added: “We are pleased to be selected by EBI, which will enable more and more UK investors to have access to our low-cost SRI index-based solutions. This partnership demonstrates our commitment to meeting the needs of UK investors, in particular for ESG index solutions at competitive pricing.”

EBI is part of Bristol-based platform Parmenion and has £2.5bn in assets under management. It runs a range of passively managed investment products including a Core ESG and Earth range for sustainable investors, and factor-based global portfolios, the World range, and Core, for market-based global exposure.

This article was written for our sister title ESG Clarity

While investing in China, or any emerging market, is a long-term game, the story over three and five years is just as stark, with the sector down 49% and 16.5%, respectively. The economic picture is just as uninspiring, as China faces the prospect of lacklustre growth in 2024, with GDP expected to grow 4.5% in real terms, compared with 5.2% in 2023 and 6+% levels in the years before the Covid pandemic. It is little surprise then, with funds under management of just £3.7bn, according to the IA over the course of 2023 to November, the IA China/Greater China sector saw outflows of close to £188m.

So as all eyes focus on China as it enters the year of the dragon, is it really all bad news? In this  head to head, James Klempster (pictured left), deputy head of the Liontrust multi-asset team, explains why he is becoming more optimistic towards China, while Andrew Mattock (pictured right), portfolio manager at Matthews Asia, calls for patience from investors.

James Klempster, deputy head of multi-asset, Liontrust

As long-term, disciplined investors, we are focused on identifying investment opportunities rather than being distracted with macro stories. While a positive economic backdrop should provide a tailwind to markets, fundamentally poor investments are unlikely to prove rewarding, even with a metaphorical gale at their backs.

Over the past 20 years, investors in Chinese stocks have regularly conflated a positive view on the economy with a positive view of the stockmarket, but history has often shown this to be a poor strategy. There are many hazards that can impact markets even against a benign, positive macro backdrop. Important factors to consider include corporate governance: whether there is a genuine culture of rewarding shareholders, and whether capital controls could hinder your ability to retrieve your investment in the future. Even if the above factors are in your favour, investing at the wrong price can mean you’re pushing a rock uphill to get returns.

See also: Head to head: The prospects for global equities in 2024

Similarly, the separation of an investment case from the macro story is equally important when news flow is universally negative. While the Chinese economy is in the doldrums and experiencing an insipid recovery, it does not necessarily follow that the stockmarket should also be written off.

The draconian Covid lockdowns followed by a surprise reopening, political crackdowns on ostentatious wealth, education provision and the property sector have all led to a degree of growing caution among investors, catalysed by a flaring of geopolitical risks.

The combination of Covid, political and corporate developments have acted to rein in globalisation, with heightened geopolitical risk arising from tensions in the Middle East and the ongoing Russian-Ukrainian war further accelerating this contraction. On top of this, China faces demographic headwinds with a declining population and an ageing workforce.

Glimmer of hope?

However, not all economies are created equal, and a poor year for China will still see growth outstripping much of the developed world. The Chinese government continues to focus on improving GDP per capita and moving its economy steadily towards higher-margin, value-adding industries such as electric cars and other technologies.

The latter can, of course, cause alarm, stoking concerns surrounding national security, with governments such as the US having a sceptical view of Chinese technology giants. And while the frosty Sino-US relationship has thawed slightly of late, the US government clearly wants to reduce its reliance on Chinese inputs into its supply chains.

Emerging markets’ poor performance over the past two to three years has a lot to do with problems stemming from China. But now China has adopted a more pro-growth, stimulus-oriented stance, emerging markets could benefit from the relative appreciation of their currencies versus a weakening dollar. They will be further boosted by international strategic supply chains being re-opened.

We do not have direct exposure to Chinese equities through a dedicated fund: an important consideration in our portfolio construction is the avoidance of an over-concentration to any countryspecific risk. Instead, we prefer to access the market in our global diversified portfolios through allocations to Asia ex Japan and emerging markets funds.

Indeed, through our overweight positions in these regions, we are currently overweight in China. Undoubtedly, there are some interesting China managers, but for us to back these strategies, we would like to see a greater number of Asia ex China and emerging markets ex China funds to avoid doubling up on our Chinese allocation.

Overall, we believe valuations on Chinese stocks remain attractive and this will prove rewarding for investors against a more forgiving economic backdrop, as indeed it will for other emerging markets and Asia ex Japan. The main driver of returns will come from the re-rating of stocks from their lowly valuations, which should follow any shift in sentiment from the current levels of scepticism that is keeping a lid on pricing.

Andrew Mattock, portfolio manager, Matthews Asia

Last year was a disappointing one for Chinese equities and the Chinese economy overall. It’s disappointing, in our view, not just in the sense of the underwhelming recovery of Chinese consumer spending post-Covid lockdowns, but also due to the lack of any significant stimulus measures by the government.

Although the government did start to gradually loosen property purchase restrictions across most cities in China, the expectations of potential home buyers regarding future house prices and their own income levels have changed. As a result, these policy changes barely helped to arrest the slump in the real estate market. As the year progressed, investors gradually gave up on the idea that the Chinese central government would step in to engineer a stronger consumption rebound.

From what we can see, many entrepreneurs – whose animal spirits were curbed during the Covid period – are now hesitating to start any new investments in this environment. From a geopolitical standpoint, the highly anticipated Biden-Xi summit in San Francisco in November didn’t really impact the ongoing concerns of the market. And staying at the macro level, Chinese equites were a key exception in a November global equities rally that followed signals by US Federal Reserve chair Jay Powell that the US interest rate-upcycle was near an end.

Both domestic and international investors have had their confidence severely tested over the past three years. There is no ‘natural’ inflow into China’s market through pensions or retirement savings plans and that has left only selected groups of companies with strong cashflow and balance sheets being active in the market, buying back their own shares.

Although we don’t fully subscribe to the theory of a ‘Japanification’ of China, we believe the government needs to do a lot more to avoid this trap and the risk of a ‘lost decade’.

Looking ahead, we remain cautiously optimistic that there will not be further meaningful deterioration in the property market. While we do not expect significant warming of geo-relations, the current status quo of a more constructive post Apec posturing would be welcomed by the market. Patience is a virtue

Among the traditional drivers of Chinese economic growth, aside from real estate, the export sector is still demonstrating some strength. However, as China grows its share of global industrial output, it raises the spectre of more trade frictions alongside continuing US tariffs.

In terms of consumption, the third economic driver, Chinese consumers are likely to continue to behave very conservatively due to a lacklustre employment market and bleak outlook for income growth. Industries with high-paying jobs have unfortunately become casualties of tightened regulation and some have been subject to pay-cut directives from the government.

Valuations continued to trend down in 2023, and the broader China market hovers around similar levels as 2009, despite a better-quality businesses and earnings profile.

We continue to believe that patience is needed in these market environments and that it will ultimately pay off once the market turns. In the current environment, we continue to stick to our knitting and deliver a consistent growth at a reasonable price strategy for our clients.

This article was written for our sister title Portfolio Adviser’s February magazine.

The economist and author tells our sister title Portfolio Adviser there is a “tug of war” debate as to whether rates will return to near-zero levels as inflation falls, then revert to a ‘new normal’ of 2% or lower; or whether the past two decades of ultra-low interest rates were an anomaly, and that they are set to return to a more normalised range of 3-5%.

Depending on which scenario comes to the fore, she says there will be significant ramifications on which asset classes will outperform, and which will struggle, over the medium-to-long term.

“Anything where the opportunity to generate returns is based on a low rate is going to suffer. So, anything that relies on leverage or on taking outsized bets – I believe venture capital falls into this space, for example,” she says. “This is why I don’t think the Targeted Absolute Return sector is winning right now, either.

“Of course, there is a debate as to whether we will return to a low rate environment, in which case these opportunities could become interesting again. But given what happened to markets in 2022, 2023 was a case of going back to basics and asking: ‘in a higher cost-of-capital environment, where will the genuine returns come from?’”

Over the last three full years, equity and corporate bond market returns have varied widely. In 2021, the MSCI All-Country World index achieved a total return of 19.6% while the Bloomberg Global Aggregate Corporate Bond index fell 2%. Then in 2022, global equities suffered with the MSCI ACWI falling by more than 8%, while global corporates also lost more than 6%. Both asset classes achieved positive returns last year at 15.3% and 5.5% respectively, according to data from FE Fundinfo.

These returns coincide with varying moves from developed market central banks in a bid to curb rising inflation. When central banks embarked on interest rate rises at the end of 2021, bonds suffered while economic uncertainty weighed on equities. Rate hikes continued throughout the course of 2023, with inflation beginning to fall by varying degrees across the US, the UK and Europe.

“In 2023 there was a lot of discussion about value investing returning to the fore,” Baroness Moyo says. “If we consider the businesses which can survive over the long term and generate real returns above the cost of capital, these types of businesses certainly do look interesting. Which is why what happened in 2023 was odd, because the performance of growth stocks such as the Magnificent Seven was an anomaly in terms of the mood music of markets, given the interest rate moves we had seen.

“In short, it has been too easy to make good returns in bog standard, traditional multi-asset portfolios. You didn’t have to go into long/short portfolios, or venture capital, or anything that required a lot of leverage to make returns. And in fact, it is those areas which have now become higher risk. So, for now, I would argue that it is still very difficult to make the case for people to allocate capital to absolute return strategies.”

See also: Morningstar: Are basic allocation strategies still relevant?

The economist says that, while investors started 2023 “excited about credit”, given interest rate expectations, they are now beginning to hold off and question longer-term themes, given continued economic uncertainty.

AI and decarbonisation

“I would argue that there are two huge key themes. One is AI; hence the Magnificent Seven breaking out of that value anomaly last year. The second one is decarbonisation,” Baroness Moyo – who is also co-principle at the Versaca Investments family office – says.

“The last time we had a catalytic move in the economy on a structural basis was the 1980s, when we saw tech investment opportunities. This is the next one.”

These two themes spell a “real fundamental shift” in how economies will work in the future and therefore which assets will perform well, the economist says, although she adds that the cost of capital “obviously matters” in terms of how people will play these markets.

In addition to historically higher rates, Baroness Moyo says geopolitics have become more volatile – at a time when markets are pricing in interest rate cuts.

“I don’t think anyone over the last year would have accounted for two wars, the announcement of 11 countries joining Brics, swing states – real issues that could now be re-inflationary,” she warns.

“US inflation still stands at 3.1%. Germany is in a recession and Europe is weak, which could signal that rate cuts could be on the docket.

“Geopolitics could be incredibly disruptive, and could mean we live a ‘higher for longer’ environment and that is set to continue.”

Finding dislocations

Alongside moving out of leveraged plays, this uncertain backdrop has also led Baroness Moyo to play equities more “opportunistically”, holding out for market dislocations in favoured sectors such as healthcare, or more attractively-valued companies set to benefit from AI.

“We are mostly looking at AI on a ‘wait-and-see’ basis for the reasons that I mentioned. But if we start to see real productivity gains and genuine possibility for disruption from AI, I think it will be an opportunity.

“What does this mean for us? It means a skew towards taking money out of equities and putting it into cash or bonds, and waiting for opportunities in these much more structured bets such as AI.

“If it is true that, over the next 20 to 30 years there will be a fundamental shift in how the world operates, we want to be a part of that. So, the best thing to do is to dip in and take some money out of markets where we could be losing and put it into bonds, which are earning us 5.5-6%, until there is more clarity around how best to play the AI space.”

That being said, Baroness Moyo has “taken a nibble” at some less widely-held stocks she believes are attractively valued such as US healthcare provider HCA and cloud-based software company Salesforce.

Not-so-magnificent Seven?

When it comes to the Magnificent Seven stocks – many of which have become synonymous with investing in AI such as Nvidia, Amazon and Alphabet – Baroness Moyo is less tempted and says valuations are “too rich”.

“I understand the whole euphoria; it’s the New Year, let’s all get excited. But the market has sold off a fair amount already, coming into the year.

“But when it comes to the Magnificent Seven, which are trading on high price-to-earnings multiples… We had a bad 2021, a mixed 2022 with a big skew to certain stocks. In 2023, my sense was that people were waiting and seeing. And now, I think people are waiting for that first rate cut, then they are going to bank as much of that return as possible.

“So if anything, I’m worried that markets are going to sell off. Not initially, but I think institutional investors could be waiting for a rate cut and a market rally, at which point they will bank their gains tactically.”

The other risk with the Magnificent Seven stocks, says Baroness Moyo, is that they account for a very significant proportion of the S&P 500. According to data from Yahoo Finance, this handful of companies accounts for 29% of the US index’s entire market cap.

“If I look at the Magnificent Seven versus the 493 remaining stocks in the index, and I had to take a bet on either a bigger rally among the Magnificent Seven, or a revenue catch-up from the 493 others, I am going to bet on the catch-up,” she reasons.

“Do I believe that tech is the future? Absolutely. But we are talking about a numbers game here. I am looking at multiples and margins, the ability to grow top-line revenue and the ability to cut costs.

“On that basis, I think it will be harder for those very efficient larger companies, which achieved enormous gains in 2023, to continue that growth. I think a lot of value has been squeezed out of the Magnificent Seven, and a lot of that value is now dependent on how they execute on AI.”

Value in energy

In contrast, Baroness Moyo says the energy sector offers attractive valuations. “Why? Because we’re consuming 100 million barrels of oil every day across 8 billion people. People need energy to live – whether that is from fossil fuels or from renewables. That is an area where I think there have been relatively bad returns, but there is real opportunity for upside.

“For me, value investing is about a compelling sector-based narrative that is based off of basic needs, such as food, energy and transportation. But these companies have to be well-run. You have to be able to look at the margins, the fundamental demand and what that might mean for long-term opportunities, in order to generate risk-adjusted returns above the cost of capital.”

For the economist, this could mean investing in companies which provide fossil fuels and are looking to embark on the transition to net zero, as well as those leading the charge on reducing our dependence on carbon.

See also: Canada Life’s Sriharan: The rules of engagement on asset allocation have changed

Zambia-born Moyo says: “When you have been raised in an environment – like I have – where electricity and water is not automatic, you have a very different understanding of how difficult it is to deliver energy and deliver water.

“In the west, there are a lot of people who have good intentions for us to move and transition into this new equilibrium, which is renewables-based. That’s fantastic. I don’t know anybody who is against that.

“However, we have to be sensible about what the costs of that journey are and how easy it is to execute. It’s 2024 and there are many countries around the world which cannot create energy on a sustainable basis. And I’m not just talking about desperately poor countries – this includes middle-income countries like South Africa. Even California has suffered from energy disruption.

“This, to me, is precisely the dislocation that presents investment opportunities. The vast scale of our energy requirements, the need to transition, and the requirement to find the best companies at actually providing this.”

Has Japan turned a corner?

On a regional, macroeconomic basis, Baroness Moyo is positive on the US and Japan. When asked whether Japan has become a consensus trade, given its recent stockmarket rally, Baroness Moyo says there are two key reasons the market has performed so well. “One is technology and the other is energy – the two big long-term trends driving markets. These are massive pivot points for the world, and I think people see Japan as very much at the coalface of that.”

But people have been predicting a “new dawn” for Japan for decades – since its economy slumped throughout the nineties. Is the recent recovery the real deal? The economist does indeed believe the country has “turned a corner”.

“It’s extremely difficult to run an economy, to get a slow economy moving, and to get businesses and companies to work efficiently. There is a whole potential system of errors – a lot of things have to go right, and we have seen in the past how quickly things can fall apart. Germany was a huge economy doing well, and look how quickly it has come off the rails,” she explains.

“Japan has a lot of things going right for it. It has strong levels of high education, it has a business sector which is sharp and knows how to innovate. It is difficult for a country to put these things in place.

“We have seen it in the UK – I often talk about how, 15 years ago, business was a big piece of the story. Business accounted for a large part of the UK economy; everyone was talking about the banks, Rolls Royce, Marks & Spencer. Today, that is less the case.”

Home market

Indeed, while the Topix has gained 9.2% over the last six months alone, according to FE Fundinfo data, the FTSE 100 has achieved less than one quarter of these gains over the same time frame, at just 1.3%. It has also achieved less than half of the gains of the MSCI All-Country World index over the last five and 10 years. Does the UK market present a value opportunity?

“I’m afraid it will still be a case of ‘wait and see’ for the UK. There is a lot of hope that this is the home of industrial revolution; that we can get back to business and back to clarity. But the business and markets have become so intertwined with politics that there is risk,” Baroness Moyo says.

See also: Facing the inflation dilemma head on

“It is at the point with politics where business has not been able to work without a political overhang creating costs from a regulatory perspective, and from a risk mitigation attitude when it comes to investing.

“In the US, if I talk about AI or the energy transition, the first question people will ask me is how much money they could make if they invest $1 – what return would this generate? When I have the same conversation in Europe, the first question is how to mitigate any risks coming from those themes.

“Our only way out of this is to find some kind of balance between these two attitudes. I’m worried that a lot of conversation in the UK is still very top down and government led, where people would rather kill off investing in certain areas, rather than use innovation to solve any issues.”

Emerging markets

Baroness Moyo is also reticent to invest in emerging market equities, arguing there are other areas where investors can generate “considerable returns, above the cost of capital, without the inherent risk”.

“I understand the arguments on paper. The macroeconomic arguments are very compelling. But as a practical matter, life is too short,” she says. “It sounds flippant, but it’s fundamentally true. Investors only have a certain number of years to make returns. That doesn’t mean they can’t ultimately achieve gains and compound those returns. But why take the risk by putting your capital in a market with slowing growth geopolitical risks and FX problems? It’s very hard.

“In my case, I only have 20 years to compound any returns. Why would I waste my time trying to work my money in an uncertain environment? Yes there could be some outside bets but I am willing to leave that money on the table.”

See also: Top five investment themes to look out for in India in 2024

She cites India as an example which is popular among investors. According to FE Fundinfo, the MSCI India index has returned 26.3% over the last year – more than double that of the MSCI ACWI.

“Lots of people say they are going to make billions by investing in India. Good luck to you, but I am willing to reduce my basis-point returns and not have to deal with the risk,” she reasons.

“Would I ever say India is never going to make it? No, it’s not my place to say that. But what I will say is it is extremely difficult to generate predictable returns in that kind of environment. There is a lot of red tape; it is definitely skewed towards locals winning over the foreign partner. It doesn’t have a great track record.

“People have to understand it’s not free money; there are other places you can invest and generate returns with relatively little risk.”

This article was written for our sister title Portfolio Adviser

Researchers at the firm noted in the report titled ‘Multi-Asset Investing: A Difficult Sport’ that many multi-asset funds have struggled to beat their benchmarks in recent times.

They noted the average ‘moderate’ global allocation Morningstar category fund trailed the euro moderate global target allocation index by 2.19% annualised over the past 10 years.

See also: It’s time for multi-asset managers to ditch bond proxies

The lure of the balanced portfolio has been its ability to limit losses in challenging stock markets through bonds’ negative correlation, the report noted. But in 2022, both stocks and bonds lost ground.

This led some to suggest the 60% equities, 40% bonds portfolio is past its due date, Morningstar said. The stock/bond correlation changes through time and, besides correlations, valuations matter. At the start of 2024, the bond market has been repriced and is now offering some of the highest yields seen for a long time.

Thomas De fauw, senior manager research analyst, and author of the report, said: “Strategic asset allocation is the main driver of a portfolio’s return and explains a great deal of the excess performance versus the benchmark. Looking at the European multi-asset universe we see a broad range of allocations in each of our categories.

See also: Chancery Lane CEO: Modern portfolio theory doesn’t work for income investors

“But benchmarking a multi-asset strategy differs substantively from a strategy focused on a single asset class as the many dimensions of multi-asset strategies complicate the analysis. Moreover, for objectives-oriented funds, such as multi-asset income or environmental, social, and governance-focused funds, there’s a specific investment outcome to consider.

“All the work that goes into achieving those goals is not always captured through benchmark-relative performance, nor is it always clear which benchmark to choose,” he added.

See also: Premier Miton’s David Jane: Reframing income as an output rather than a style