Risk assets have been on the rise this year as fears over a hard landing subsided in many developed market economies.
Yet potential frights could be waiting around the corner for investors, particularly with the highly contentious US election just days away.
This Halloween, four investment professionals discuss areas to be wary of as we move towards 2025.
An unbalanced multipolar world
Subitha Subramaniam, head of investment strategy at Sarasin & Partners
The geopolitical landscape is undergoing a profound transformation. US hegemony is giving way to an unbalanced multipolar world, while China’s rapid economic and military rise is creating a new ‘pole’. China has assembled a loose coalition of mostly authoritarian allies – Iran, Russia, and North Korea – which are seeking to subvert US dominance. Hostile rhetoric and tit-for-tat sanctions reveal hardening positions.
At the current trajectory, the likelihood of a confrontation, with Taiwan emerging as a potential flashpoint, is increasing. An end game where China establishes indirect control over Taiwan, with the US potentially backing down to avoid direct conflict, has gone from unthinkable to plausible.
A gradual retreat by the US from its role as a global policeman is likely to make the geopolitical environment much more uncertain and insecure. As global power shifts away from the US, the integrated global financial system it supports is also likely to splinter, recalibrating both the risks and opportunities in financial markets.
In this new era of multipolarity, it is crucial that investors anticipate and adapt to the shifting tides of geopolitics, managing the inherent risks and capitalising on the opportunities associated with a more complex and volatile landscape.
Friendshoring to bypass China
Ivan Morozov, sovereign credit research analyst at T. Rowe Price
China looks set to be one of the biggest losers of shifting trade patterns as both changes in the competitiveness landscape in Asia and the global friendshoring trend are pushing investments away from the country.
China has lost its cost advantage as unit labour costs have more than doubled, reaching or exceeding those of many other countries in the region, including South Korea, Taiwan, and Thailand. At the same time, growing concerns over supply chain stability are persuading major global producers to consider shifting their operations elsewhere.
We believe China may lose its dominant role in global goods exports as companies, including some Chinese firms, move production abroad. While China will continue to play a major role in electric vehicle production, a large part of that production will be moved away from China to be closer to final markets in the US and Europe.
Investor miner fears misplaced
Tom Roderick, portfolio manager of the Trium Epynt Macro fund
Gold is commonly held in portfolios in the hope it will offer protection during ‘risk-off’ episodes. For us, it is a play on emerging market (EM) central bank buying – and the risk China, and other non-aligned powers, break away from the US sphere. We see particular opportunity in the lowly-valued miners, but many investors have concerns about perceived historic underperformance. We think these concerns are misplaced.
Unlike physical gold, the miners deliver high cashflows and pay dividends, which makes a big difference over the long term. And the miners have a very different volatility profile to physical gold. The risk and potential return associated with gold equities is about 2.5 times that of gold.
When rates are high, taking a larger position in physical gold, rather than a smaller, risk-equivalent position in the miners, sacrifices a sizeable percentage of portfolio assets that cannot sit in high-yielding bills. In the long run, this adds up.
Once these factors are properly accounted for, the perceived outperformance of gold over miners disappears. We see a multi-year opportunity on the back of significant, less cyclical, EM accumulation, and believe it is important to correct the record before considering the best way to take advantage.
Office property requires caution
Geoffrey Dybas, lead portfolio manager of Nordea’s Global Real Estate strategy
The office property sector will likely remain one of the more challenging and controversial sectors on a global basis. Though hybrid work is a secular trend that has continued to put downward pressure on offices, there has been a shift to more cyclical concerns related to slowing office job growth, lower job postings, and higher rates.
We remain very selective and cautious about offices. Our holdings within the sector are concentrated in companies with steady cashflow generation and strong balance sheets, with a high-quality portfolio of properties that are mostly located in central business district areas, which have higher occupancy rates and pricing power.
However, it is important to highlight offices do not represent a big part of the publicly listed real estate universe at just 5%. Given the growth of non-core sectors within public real estate, offices are becoming less relevant when compared to ten years ago, when the sector was about 15% of the listed universe. Notably, offices are close to 25% of the private real estate market given the less non-core property exposure.
