In developed economy elections around the world in 2024—from France to the United Kingdom to Japan to the United States—voters demanded change, as the lingering squeeze from prior years’ inflation ignited a desire to punish incumbents. In each country, the circumstances beyond inflation differ and the policy consequences will diverge. But change is in the air, with meaningful economic and market implications across each major economy.

This is an analysis of the forces that are most likely to impact markets in this unusually uncertain year.

In the United States, significant policy changes could materially affect global growth, US inflation, and corporate profitability.

China will be at the center of the storm and is likely to respond to US protectionism with asymmetrical retaliatory measures and substantial fiscal and monetary stimulus.

The Eurozone is likely to be tested by US trade policy, fiscal pressure from higher defense spending, and the potential security threat from an emboldened Russia.

Japan will struggle to balance the benefits of positive inflation against voter anger over cost-of-living increases and the desire to stabilize the yen.

The geopolitical backdrop is likely to shift meaningfully as the United States retrenches from multilateralism and diminishes its commitments to mutual defense treaty partners.

The changing global backdrop could significantly affect prices across asset classes, with elevated dispersion within them. Investors will therefore need to reevaluate likely winners and losers across countries, sectors, and companies.

Investment implications

The biggest challenge from a market perspective lies in quantifying the independent effects of potential policy changes and then attempting to understand how these countervailing impacts will interact.

For example, economists can estimate the inflationary and growth impacts of increased tariffs, but even these estimates are subject to large error bands.

Several questions remain unanswered: When will tariffs be applied? Will they be applied all at once, or gradually over time? Which items will they be applied to? Will they be applied uniformly? If not, what will the nuances be?

Predicting the customer responses to policy changes is also imprecise. For example, if one million undocumented immigrants were deported in 2025, what might that mean to wage growth by sector? How will compensation increases resulting from deportations affect broader price levels? Even more difficult to forecast is the impact of broad price-level increases on wage demands in sectors that are not directly impacted by deportations.

Finally, there is the complexity of measuring the impact that deregulation and lower tax rates could have on the “animal spirits,” or psychology of all market participants.

With that cautionary note in mind, my base case expectation is that inflation will increase moderately in 2025 due to tariffs and modest increases in consumption driven by wealth effects and optimism around perceptions of a more growth-oriented economic agenda.

In 2026, I expect further increases in inflationary pressure as immigration policies and tariffs accumulate. With this backdrop, I see the US 10-Year Treasury yield moving back toward 5% and the fed funds rate staying at or above 4%.

While it might be tempting for investors to extend duration in their portfolios if the 10-year Treasury reaches a 5% yield again, I would caution against any excessive reallocation. This is because the shifting policy backdrop could lead to a sustained grind higher in US government financing costs as key policy changes reignite inflation and budget deficits remain elevated.

To the extent Fed independence is also called into question against a backdrop of elevated inflation and deficits, rates could rise sharply.

With trade and immigration policy depressing growth and raising inflation, while deregulation and tax policy increase corporate profitability, I would expect credit spreads to remain tight as recession risk appears low.

However, if I am wrong, the accumulated uncertainty created by so much change and an escalating global trade war could at some point negatively impact investor psychology, leading to wider credit spreads and perceptions of increased recession risk. Put simply, my preference remains to be more exposed to intermediate-duration and higher-quality borrowers rather than reaching for yield in riskier areas, such as the high yield market or leveraged loans, given the outsized risk of an unexpected downturn.

For US equities, the initial response to the US election was positive as investors focused on the obvious tailwinds to profitability: lower corporate tax rates and less regulation. However, I expect much more dispersion within the equity market when the reality of a much-less-friendly trade environment sets in. Some companies, such as those in the financial services and energy sectors, will be less vulnerable to tariffs while others, such as those in the consumer discretionary arena, will be much more

In the immediate aftermath of the US election, non-US equities initially underperformed US peers. However, 2025 could present an excellent opportunity to add capital in non-US markets as investors recalibrate assumptions regarding the relative winners and losers from the reshaping of global supply chains against an evolving geopolitical backdrop.

In three of the last five quarters, foreign direct investment into China has been negative, and I expect to see more capital being redirected away from China in the years ahead.

Looking beyond geography, I continue to believe the two most transformational economic themes in our lifetimes will be the advent of artificial intelligence (AI) and the energy transition. Investors are fully engaged in the AI trade but are increasingly discarding shares related to clean energy.

I believe a great investment opportunity could be in the making, as climate change continues unabated and the profit opportunity from investing in both mitigation and adaptation grows. In the case of AI, the most attractive near-term opportunity might still be in the market leaders, but I believe it will increasingly shift to the companies that effectively deploy AI into their operations in a way that generates meaningful returns on investment.

By Ronald Temple, chief markets strategist, Lazard

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 Chinese property sector, which makes up around a quarter of the country’s economy, has been a particular drag on returns over the last year. In January, one of the sector’s leading players, China Evergrande, entered into a forced liquidation.

This was seen in the month’s worst performing individual funds, with the £14.1m Redwheel China Equity, £203.3m Baillie Gifford China, and £5.8m JPM China all among the bottom 10 for returns. Climate strategies, such as Baillie Gifford Climate Optimism and Active Solar also struggled in January.

In contrast, IA North America and Technology were the two best-performing sectors, up 3% and 4.8% respectively.

Ben Yearsley, director at Fairview Investing, said. “These two are so intertwined that it does distort the picture of US equities. Microsoft is again the world’s largest company with a value just under $3trn. But with Apple, Alphabet and Amazon also in the top ten, a tech fund, a Nasdaq tracker, an S&P tracker and a MSCI World tracker look very similar and perform in tandem.”

See also: Global sustainable funds see first quarter of outflows

He added: “The positive equity stories of 2023 all continue with tech, India, and Japan all starting 2024 with a bang. Two of those areas look pretty expensive – then again they almost always do. Japan remains one of the most interesting stories with corporate change and more shareholder awareness helping drive markets. On the other side, China can’t seem to escape the doom loop – Beijing need a big bang to pull markets from historic lows.”

Yearsley pointed out that, for a brief period of time in January, markets regained some confidence after Beijing announced stimulus measures. However this confidence evaporated, with the Hang Seng index finishing the month down by more than 9%.

“Contrast that with Japan where the Topix put on almost 7% – the BoJ has kept the world’s last remaining negative interest rate policy and wants inflation. Despite the excellent returns from Japanese equities many fund managers are confident on future returns and thinking this is just the start of a sustained bull run. The FTSE had a lacklustre start to 2024 falling 1.27%.”

Oxeye Hedged Income was the top performing fund, returning 9.5% in January. Yearsley noted the fund has regularly topped and tailed the monthly performance tables over the past few years.

Jupiter’s India-focused offerings, Jupiter India and Jupiter India Select, both performed strongly by returning 8.7% and 8.3% respectively. The average IA India fund returned 1.8% over the month.

Speculation that the business could see its workforce shrink by some 10% was first published by Sky News yesterday afternoon, with a source telling its city editor Mark Kleinman that 500 of 5,000 employees could lose their jobs.

Now, CEO Stephen Bird has confirmed that Abrdn is targeting an annualised cost reduction of at least £150m by the end of 2025, with 80% of these savings being made in the Investments part of the business. The target does not include any previously-confirmed divestments, but does include the “removal of management layers” which will “increase spans of control” for employees. This will be across group functions and support services.

Abrdn added that the front office of its investment arm will “see a modest adjustment”, although it stressed that the firm’s focus “remains on delivering excellent client service” and “strongly competitive performance” to its clients.

The firm will make further “efficiencies” in outsourcing and technology capabilities, with Abrdn stressing that “a bulk” of the savings will be not be made across staff costs.

It was also confirmed yesterday that Abrdn’s ABS managers Scott Duggal and Janaka Nanayakkara are due to depart the firm, as the fund moves to a new team.

See also: What does 2024 hold in store for the wealth management industry?

CEO Stephen Bird said: “Market conditions have remained challenging for our mix of business, and this is reflected in our year-end AUMA, flow numbers, and margins. The board and I are committed to taking these significant cost actions now to restore our core investments business to a more acceptable level of profitability.

“Although our business model benefits from the diversification that comes from operating three businesses, we will not rest until all of them are contributing strongly to group profitability, as Adviser and Interactive Investor have done in 2023.”

He added the transformation plan will deliver a “step change” in the firm’s cost-to-income ratio.

“We exceeded our £75m cost reduction target for 2023 for Investments, but we recognise more needs to be done. After a root and branch review, we are now re-engineering and simplifying our business model to remove at least £150m of costs – mostly from group functions and support services.

“The programme will largely be implemented in 2024, completing in 2025. These changes will allow us to continue our focus on building a growth business.”

A saving of £60m expected by the end of 2024, while the remaining £90m is due to be slashed next year.

Outflows

The redundancies follow outflows of £12.5bn for the Investments arm of the business during H2 last year, with assets under management and advice standing at £366.7bn. This represents small reduction from £367.6bn at the end of H1 2023, with losses partially offset by positive investment performance.

Abrdn said investor sentiment suffered due to “high inflation and geopolitical uncertainty”, which “continued the trend to cash and de-risking of client portfolios”.

“The industry saw continued net outflows in H2 across global active mutual funds. The changing dynamics and challenges within traditional asset management are well known and we continue to reshape our business to take account of these factors.”

Elsewhere, the institutional and retail wealth part of Abrdn suffered gross outflows of £11.2bn in H2, but net outflows of £8.3bn which the firm said was driven by negative sentiment towards equities and fixed income. The arm also suffered £6.7bn gross outflows in H1, with assets now standing at £211.2bn.

See also: Why investors need to take outlooks with a pinch of salt

Interactive Investor saw an inflow of £1.4bn in H2 2023 with assets at £61.7bn, while the Personal Wealth arm saw saw outflows of £300m. Assets here now stand at £4.3bn.

Overall, Abrdn’s AUMA is £494.9bn as at 31 December 2023, which includes a £6.9bn reduction due to “corporate actions”, including the disposal of its discretionary fund management arm – which contributed £6.1bn in AUM, and its £4.1bn US private equity business. It also acquired healthcare fund management business Tekla for £2.3bn, and four closed-end funds from Macquarie for £700m.

H2 2023 net outflows of £12.4bn represented 3% of the business’s opening AUMA. Net outflows excluding liquidity amounted to £9.5bn.

Abrdn has been hampered by lacklustre performance for some time, having been relegated from the FTSE 100 to the FTSE 250 index twice in 2023. In its H1 2023 results published in August last year, profits for Abrdn’s investment arm fell by 66% and fund flows plummeted 83% year-on-year.

Credit ratings issuer Moody’s downgraded Abrdn’s long-term issuer rating from Baa1 to A3 due to “idiosyncratic weaknesses in its profile” as well as “industry-wide headwinds.

CEO Stephen Bird has been streamlining the business’s product range and services in a bid to improve profitability, announcing a strategic review in July last year. The operation involved the launch of Abrdn’s Multi-Asset Investment Solutions franchise, which aimed to simplify the company’s product suite, improve performance and clarify performance objectives. This included folding the once-behemoth GARS fund into the firm’s Diversified Assets suite of funds, as well as closing three “other “liability-aware” absolute return funds.

Abrdn has also proposed merging several of its investment trusts over recent months, either with other internal investment companies, or with portfolios outside of Abrdn’s management. These include merging Abrdn Smaller Companies Investment Trust and Shires Income; the winding up of Abrdn China Investment Company into Fidelity China Special Situations; and folding Abrdn Property Income Trust into Custodian Property Income Reit.

This article was written for our sister title Portfolio Adviser

The 39 reaching the status make up 2.8% of funds, a decrease from the 3.9% of funds reaching a top-quartile performance in Q3 of 2023. Historically, the percentage of funds with top-quartile status has sat between 2-4%. While the number of specific funds with top-quartile performances decreased in the final quarter of the year, only two of the Investment Association’s 56 sectors failed to achieve positive total returns, on average.

Kelly Prior, investment manager in the multi-manager team at Columbia Threadneedle Investments, said: “Consistency faltered in the fourth quarter as the mood music again took on a different tempo. Having failed to respond to expectations of a change in rate outlook for much of the year, the final Federal Reserve meeting of 2023 offered a more dovish tone.

The Japan sector had the largest number of funds which reached top quartile, with 12.3% of the funds sitting within that group. Japan also had 32.3% of funds that performed above the median over three years.

“Japan proved to be something of an outlier in 2023,” Prior said. “A market often forgotten due to its ever-decreasing importance in global indices, it continues to prove a rich hunting ground for active management.”

See also: Square Mile: Nine funds poised for success in 2024

The two sectors which recorded negative performance in the fourth quarter of 2023 were China/Greater China, which fell 8.4%, and UK Direct Property, which lost 0.2%. The greatest returns came from the Latin America sector, up by 12%, and the Technology & Telecom sector, returning an average of 11.8%. Property Other also saw strong gains, with an increase of 10.3%.

“As we peer into our tea leaves for inspiration for the year to come it strikes us that we may be nearing a time to be brave. China, the standout underperformer this quarter, looks ripe for a change of sentiment while India is priced for perfection, and if private equity needs to start deploying capital, then smaller companies are viewed as a steal, particularly in the UK,” Prior said.

“High yield has been fabulous but when floating rates start to bite there will be winners and losers, and emerging market central bankers have been ahead of the curve in hiking and then cutting interest rates while their developed market cousins sat on the side lines. Indeed, a change in the fortunes of the ‘Magnificent Seven’ stocks could result in a change in consistency outcomes for US equity funds too.”

This article was written for our sister title Portfolio Adviser