Policy uncertainty argues for a global, selective approach to stocks
Portfolio Manager Julian McManus says a new administration in the U.S. could usher in more volatility for global equity markets in 2025, making it all the more important to focus on corporate fundamentals, such as free cash flow.
1 minute watch
Key takeaways:
- The outcome of the U.S. election is likely to usher in new trade and fiscal policies that could increase volatility in global equity markets in 2025.
- The transition could also create opportunities for investors to capitalize on new sources of growth and take advantage of gaps in valuation.
- In our view, a global bottom-up approach to equity investing next year could help investors build a more resilient portfolio amid a period of heightened uncertainty.
Julian McManus: When we look ahead to the outlook for global equities in 2025, looking outside the U.S., first of all, I think it’s going to be less dictated by what happens to rates in the sense that I think the the default world view of markets until just the last month or so had been an expectation for rates to fall in a synchronized way—excluding Japan, of course, which is on its own rate cycle.
I think with a Trump administration coming in, who’s likely to introduce some inflationary policies, those rate expectations are now being rethought and readdressed. So, I think, instead, it’s probably more helpful to look for returns on a more bottom-up basis, and that plays to our strengths, which of course is looking for free-cash-flow growth that’s undervalued by the market.
And we find that in a number of areas. So, there’s opportunity in defense. As the U.S. pivots away from Europe and NATO and more to the Pacific, European governments are going to have to step up and pay for their own defense. And so, you’re going to see, I think in aggregate, much more money spent as countries rebuild their security and their defense.
I think Asia is going to be a fascinating case in diverging fortunes, and you’ll have “the haves” and “the have-nots.” I think China is definitely going to be in a tougher place as the U.S. gets tougher around sanctions and trade deficits and trade imbalances. At the same time, I think India is very much on the ascendant. We’re finding reasons for long-term growth that’s going to sustain there for a long period of time.
And then of course, Japan, which will be more of an idiosyncratic story. There’s a lot of value here and there, but you have to be selective. You have to be able to find the value on a bottom-up basis, where the hidden value is often lower down in the balance sheet, capital structures getting more efficient, and companies getting a little more motivated around profitability, as well.
Also see opportunities for…on the valuation side. In many cases in, for example, Europe, you do have lower multiples, but you also have lower growth rates. And we’re by no means arguing for a closing of P/E [price-to-earnings] multiples between Europe and the U.S. to parity. I don’t think that’s realistic. That said, we find that there are some quite attractive, reasonably fast-growing companies in Europe and in, for example, Asia and Japan.
On the flipside, in the U.S., we also see pockets of probably stretched valuations. And so, you could see, at the margin, the U.S. get cheaper—or, I should say multiples correct and compress—and some pockets of Europe and Asia actually increase.
I think, unsurprisingly, the main risks are volatility around geopolitics. We are seeing play out, in real time, a series of appointments by the incoming [Trump] administration set to take over in January that point to a quite a hardline hawkish policy, particularly as it relates to foreign policy and trade. And so, I think the one thing that we can predict is that risk is back, and volatility is rising. And we just have to make sure that the companies we’re invested in are resilient to that volatility and stay focused on free cash flow.
IMPORTANT INFORMATION
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Free cash flow (FCF) yield is a financial ratio that measures how much cash flow a company has in case of its liquidation or other obligations by comparing the free cash flow per share with the market price per share and indicates the level of cash flow the company will earn against its share market value.
Idiosyncratic risks are factors that are specific to a particular company and have little or no correlation with market risk.
Price-to-Earnings (P/E) Ratio measures share price compared to earnings per share for a stock or stocks in a portfolio.
Monetary Policy refers to the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.
Volatility measures risk using the dispersion of returns for a given investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
1 minute watch
Key takeaways:
- The outcome of the U.S. election is likely to usher in new trade and fiscal policies that could increase volatility in global equity markets in 2025.
- The transition could also create opportunities for investors to capitalize on new sources of growth and take advantage of gaps in valuation.
- In our view, a global bottom-up approach to equity investing next year could help investors build a more resilient portfolio amid a period of heightened uncertainty.