Global stock markets are starting to diversify. While the US has bounced back in recent months, investors are starting to look around for new opportunities and move away from a narrow focus on a handful of US technology companies. In this shifting environment, investors may want to take a fresh look at their portfolio allocation. We believe a number of factors are likely to become more important.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
US exposure needs to be intentional
The US market is a significant share of most global indices – 72.5% of the MSCI World index or 63.7% of the FTSE All-World index*. It is also a significant holding for many active funds, particularly those with a ‘growth’ or ‘innovation’ flavour. There is nothing wrong with this. Whatever its current political disruption, the US remains at the heart of global innovation and has the largest, broadest stock market in the world.
The past few months have shown its ‘bounce-back ability’ as it recovered from a difficult start to the year.
However, investors need to make sure it is right for them and that they are aware of the risks. The US market is looking historically expensive and a lot of growth is already priced into US stocks. The days of clinging on to a few tech stocks and hoping for the best may be over. US exposure needs to be carefully selected and well considered.
The Rathbones Global Opportunities fund is a good example. Manager James Thomson says: “I don’t think this is the end of US exceptionalism, given the extraordinary adaptability and resilience of US businesses. I believe they’re stronger than any President. I have 70% of my fund invested in US equities. I’ve just bought three new American stocks. My watchlist is filled with more. The US remains the home of innovation, adaptability, and repeatable and mission-critical growth, in my opinion… But my US exposure and my total fund exposure does differ from the index. Fund analysts track something called active share; mine is over 80%.”
If an investor has a lot of US exposure, it may be worth balancing it out with a less US-exposed fund. That could be one of the top-performing value funds, such as Ranmore Global Equity, which has just 21% in the US and only 4% in technology**.
Consider emerging markets exposure
Emerging markets have become a sideshow amid the vogue for all things US-related. However, there are signs that they are picking up again and may become a more important part of investor’s portfolios once again. The most recent Bank of America fund manager survey – an influential survey of investment experts and their current views on markets – found that a net 37% of fund managers are overweight emerging market equities, the highest level since February 2023***.
Confidence in emerging markets has been buoyed by a stronger Chinese economy and a weaker dollar. A weaker dollar is usually helpful for emerging markets, allowing their central banks to cut interest rates. While there have been pockets of weakness, such as India, emerging markets as a whole have outpaced developed markets since the start of the year. The MSCI Emerging Markets index is up 17.5% versus just 10.9% for the MSCI World, in dollar terms*.
We like funds such as the Federated Hermes Asia ex Japan Equity fund, which has a chunky weighting in China (41%)**. FSSA Global Emerging Markets Focus is another option, bringing together a portfolio of high-growth companies from across emerging markets.
Looking beyond AI
Artificial intelligence has been the dominant growth theme and the recent round of big tech earnings statements suggests that it is alive and kicking. However, a lot of people know about it and share prices look stretched. There are plenty of other exciting growth themes in the global economy that are better value.
In its Growth America fund, for example, Comgest is looking at a diverse range of growth drivers and sectors, “including technology, payment infrastructure, uniform rentals, animal health, and construction materials, among others. In this sense, the fund’s returns have historically been less concentrated than the S&P 500 in the so-called ‘Magnificent Seven’ stocks. Instead, performance has been driven by a broader mix of companies such as Costco, Eli Lilly, and Oracle among others.” Recent additions to the fund include companies focused on payments and ride-hailing, plus ratings, index services, and mission-critical communication networks, all of which have strong competitive moats and long-term growth potential.
IFSL Marlborough Global Innovation is another option for investors looking for a broader range of growth areas. Its focus on smaller companies (at least half the portfolio) means it is picking up growth stories early on their path.
Don’t forget income
In recent weeks, concerns have been mounting over the apparent complacency of markets, which have glided higher in spite of the ongoing uncertainty on tariffs and economic growth. This is mainly a problem for the US – in the UK, Emerging markets and Europe, valuations still look reasonable. However, for investors that are worried, income funds offer some natural security. Investors can be reassured that they are receiving a little bit of their money back each year, no matter what is happening in broader markets.
The M&G Global Dividend fund provides both diversification from many global funds, and diversification from a conventional equity income fund. Manager Stuart Rhodes targets companies that can grow their dividends over time, and his top holdings are an eclectic mix, including companies such as Methanex, Gibson Energy and Keyera**, with a current yield of 2.41%^. For a slightly higher yielding (but equally diversifying) option, the Guinness Global Equity Income fund has a yield of 2.61%^ and aims to provide investors with both income and long-term capital appreciation.
It’s best to be prepared. By taking these factors into account, investors can equip themselves for a different type of market.
