The editor takes a broad look at the kind of considerations facing wealth management asset allocators and investment advisors as a new year gets under way.
If there was any kind of consensus from the mass of investment
commentaries that we received at the end of last year, (see
an overview) it was that the strong stock market gains of
2024 don’t look likely to be repeated in 2025, even though
indices should, broadly, go up.
Another theme was that the blow-out to public debt in several
countries, such as France and the UK, will give wealth asset
allocators a migraine.
Added to this, is the idea that emerging markets, in all their
variety, offer opportunities but it remains important for
investors to tap into expertise, pay close attention to
on-the-ground news and avoid getting stuck in highly illiquid
investments. For those unwilling to devote the time and effort to
do this, maybe the wisest course right now is some limited
exposure via an exchange-traded fund and be mindful of the
risks.
A good deal of the immediate financial developments in early 2025
are in Europe. We have seen bond yields rise, amid concerns about
rising public debt, ineffectual government policy, sluggish
growth and hence a possible “doom loop” effect of the process
getting worse. The 10-year government bond (gilt) yield has risen
from 3.8 per cent at the start of 2024 to rise to more than 4.8
per cent (source: Financial Times). Meanwhile, in
France, the yield on the 10-year has risen from 2.67 per cent to
3.407 per cent; in the US, the 10-year yield has risen from 3.95
per cent to 4.702 per cent. Germany, wracked by political
weakness, is no better: rising from 2.14 per cent and now at 2.6
per cent (Trading Economics).
And that means the amount mortgage borrowers, for example, pay
tends to rise, given that loan prices are tied to medium-term
government debt prices. Central banks began easing rates last
year after the post-pandemic rises, but rising bond yields will
blunt some of that downward impact on borrowing costs.
What’s going to be important, particularly if a world of rising
yields is joined by currency depreciation in nations such as the
UK – as is now happening with sterling – is how asset allocators
play this. Can they, for example, just stick to the old 60/40
equity/bond split in portfolios and use debt as ballast in
portfolios, and maybe with a bit of gold and cash on the side? It
might be the case that if governments are forced to slash budgets
and hike taxes in some cases, bond prices might recover, but
that’s unclear.
What appears to be the case is that in countries such as the UK
and France, where public spending share of GDP are 44 per cent
and 57 per cent, respectively (Trading Economics), these
nations are also now well on the wrong side of the “Laffer
Curve.” (This refers to the idea that if taxes in general are
above a certain marginal rate, it brings in less revenue, rather
than more. The idea was developed by US economist Arthur Laffer,
often seen as the father of “supply side economics.”)
Watch currencies
What also appears to be important is that asset allocators need
to think hard about the impact of currency moves this year. An
unhedged investor can lose a chunk of a market gain in another
country. An exchange rate “overlay” strategy to curb risks from
forex moves, and potentially profit from them, costs money to
implement, but like an insurance premium, may be needed to buy
peace of mind and set expectations. In fact, I would not be
surprised to see those working in areas such as the options
market talking about the value of these derivatives in
offering downside protection in certain markets. Again, these all
come at a cost. This also reminds us that smart wealth management
must start with financial planning and goal-setting, and work
through from there to specific ideas on how to reach a desired
outcome.
I also expect that the gyrations in public markets will ensure
that HNW investors are encouraged to keep adding to private
market areas, such as private equity. However, they’re not immune
to rising borrowing costs – when interest rates surged
post-pandemic, it hit venture capital fundraising hard. The IMF
warned more than a year ago that private credit, a space that has
grown rapidly since the 2008 financial crash, did not yet pose a
systemic risk to financial markets, but it was a red flag,
nonetheless. Private markets are important for diversification –
but risks still apply. That may encourage more talk this year
about the need to spread investments across a range of different
vintages.
Understanding that wise wealth management and risk management are
often one and the same is a theme that I expect to play out quite
a lot this year, going beyond traditional ideas about
diversification, important though they are. And as we have noted
before, how a person parks his or her money (asset
location) will be as important as where (allocation). People
will need to pay even more attention to after-tax returns, types
of share class (some are subject to capital gains tax, while
others are subject to income tax, etc); liquidity conditions, and
so on. There’s no point holding a high-performing investment if
its tax treatment is more severe than a less impressive one, and
so on.
What much of this boils down to is that shrewd private client
wealth management remains as important as ever. Advisors must
work hard to keep clients composed; focus on the need to see
through the fog of market gyrations and focus on the client’s
goals; understand the need for tactical adjustment and agility
and be alert to opportunities where they arise. Managers may be
able to harness new digital technology tools to put ideas to work
and keep on top of the data, but the human touch is, in such
unsettled times, as important as ever.
