Stephen Miller

Global markets will face a challenging year ahead with turbulence and uncertainty from some key areas dominating the investing landscape. Artificial intelligence, geopolitics and inflation will continue to influence market volatility in 2026, according to GSFM and its fund manager partners Auscap Asset Management, Man Group and CI Global Asset Management. 

GSFM investment strategist, Stephen Miller, says the existing “stagflation-lite” scenario and current macro and geopolitical uncertainties may dampen market sentiment in 2026.

“Ongoing resilience in the macroeconomy and slowly declining inflation – should it eventuate – may see a broadening of stock performance. But with “stagflation-lite” not yet vanquished as a scenario, and with conventional valuation metrics showing equity markets in extremely “rich” valuation territory, it pays to be cognisant of a number of macro and geopolitical uncertainties that may yet derail equity market ebullience.

“A clear uncertainty on the investment horizon for 2026 are the tectonic shifts in the geopolitical arena.

“President Trump’s “Donroe Doctrine” is perhaps the notable geopolitical development in 2026 along perhaps with the fracturing of the NATO alliance.

“By appearing to embrace a “spheres of influence” view of the world whereby the “Great powers” assert control over their respective regions, the Donroe Doctrine may well see the world divide into “Great power” blocks. That might encourage China to formally access Taiwan. It might empower Russia in the Baltics creating challenges for the European Alliance / European Union, itself a little fractured as politics in Europe becomes more polarised.

“Were those spheres of influence to also manifest themselves in an economic sense it might further damage global trading architecture through protectionist tariff measures and retaliation and prove a headwind for global economic activity,” says Miller.

Auscap Asset Management’s CIO, Tim Carleton says that the market may well continue to focus on inflation in 2026 given its potential to impact interest rates.

“We have persistent wage inflation, booming commodity markets and fiscal stimulation in Australia and the US, all leading to inflation levels above central bank targets. Should we see a dovish Federal Reserve chair appointed at the same time as we get a continued pickup in underlying inflation we are cognisant that there may be a reaction at the long end in the bond market. This could have the potential to impact equities markets.”

“From an investment perspective, this may create some great opportunities. During 2025 we saw the unwinding of a bubble in many high quality companies that has been in place for a number of years. The extremely low interest rate environment during the COVID period resulted in very strong performance and stretched valuations for many of the great listed businesses that were seen as having reliable growth that would be largely independent of the cycle and macroeconomic environment. Valuations for these businesses are now getting back to more normal historical levels. Should the derating continue, it will present some interesting and compelling investment opportunities in businesses we would be interested in owning at the right price,” says Carleton.

Given the year started in the midst of a commodity bull market, Carleton expects very strong earnings near term from companies exposed to commodities.

“Gold, precious metals, lithium and copper all kicked off this year very strongly, which should result in meaningful upgrades to earnings estimates. However, we are also wary that commodity strength is often typical of the late stages of a bull market.”

Carleton adds the big four domestic banks have started the year at near record multiples of earnings, despite the emergence of competitive pressures in the banking sector.

“We think caution is warranted in relation to the major domestic banks. They are likely to come under continued competitive pressure from Macquarie Group as it pushes further into housing lending, as well as from the Government in relation to the low interest rates that most customers are receiving in their savings accounts, despite advertised rates being significantly higher.”

Man Group’s head of Asia (ex-Japan) equities, Andrew Swan, says that Asian markets are in a renaissance, with the second-leg of growth expected as global growth strengthens.

“Having staged a quiet comeback and delivering its second best performance since 2010, Asian markets are on the path for further outperformance this year driven by the global demand for artificial intelligence (AI).

“We are seeing strong guidance from semiconductor companies in the region suggesting demand for AI remains strong. Earnings have also been on an upward trajectory over the years, and that is important for share prices.

A part of the next leg of growth in the region Swan says will come from the execution of China’s five-year plan, which starts this year in 2026.

“The Chinese economy needs to pivot away from just investment to more balanced growth, with a focus on consumption.

“However, the opportunity set is now broadening beyond China, with other markets in the region, like Indonesia, set to benefit from lower interest rates.

“Another opportunity we see is with India, which has been through a correction. Valuations have corrected along with earnings growth expectations. There are clear signs that that Indian economy is bottoming out now, and expectations are much more reasonable from an earnings point of view,” says Swan.

Geof Marshall, private markets lead at CI Global Asset Management, says just as the AI narrative has dominated public markets in 2025, it also impacted private equity and venture capital investment decisions last year, and he expects this will likely continue in 2026.

“Private markets continued to evolve in 2025, with private equity still challenged by a lack of monetisation impacting fundraising, and private credit continuing to disintermediate the banking channel.”

“Blurring the line between private equity given their size, and venture capital given their negative cash flows, the private market answer to the Mag 7 – the ‘Private Mag 7’ (comprising of Anduril, Anthropic, Databricks, OpenAI, SpaceX, Stripe, and xAI ) – now have an implied total valuation of more than US$1.4 trillion, or about the same size as the German stock market.”

“This will have a marked impact on private equity and venture capital investment in 2026,” he says.

Marshall adds that non-AI related activity is also likely to increase in 2026 despite a three-year period of muted returns.

“General partners (GP) – those that make the investment decisions for private market funds – are sitting on dry powder in excess of $1 trillion and credit markets are very accommodative, partly because the equity component of recent leveraged buyouts have been larger and the debt component smaller. This may auger a return to private equity roots of ‘buy cheap and fix or build’ over financial engineering.

“Over the past year generalist investors and the media have looked for problems in private credit. While it is true that rapid growth in an asset class can lead to poor underwriting and lower returns, as Apollo has pointed out, it is hard to reconcile equity markets at or near all-time highs with high default rates.

“In terms of asset classes, infrastructure has outperformed real estate on returns, volatility, and fundraising since 2022. This seems likely to continue in 2026 as real estate, while stabilised, continues to wrestle with secular changes. The infrastructure opportunity set grows, especially in power generation with the ongoing demand for AI.

“These asset classes are likely to outperform their public market equivalents in 2026, earning their illiquidity premium, and providing good opportunities for private market investors,” says Marshall.

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Andrew Swan

The next five-year plan from the Chinese government is likely to move the country from deflation to reflation, according to portfolio manager of Man GLG Asia Opportunities Fund, Andrew Swan. He says the focus will be on domestic demand to lift consumption levels in the economy.

“The Chinese government has described its next five-year plan as aiming to vigorously improve consumption as a share of GDP. This reflects the government’s desire to achieve balanced growth by providing greater economic incentives to increase household disposable income and boost consumer confidence to spend more in the local economy.

“If all the goals set out in the five year plan are delivered, it will positively impact investment markets as increased consumption will drive up corporate profits of Chinese companies,” says Mr Swan.

As with China’s previous five year plan there will be winners and losers, he says.

“The previous plan resulted in a fairly narrow set of winners, but it may be different this time around.

“The structural reforms that will encourage higher consumption will in turn drive prices higher. Higher prices have a positive impact on GDP, which bodes well for corporate profitability and for the broader equity market,” says Mr Swan.

In terms of trade negotiations with the US, Mr Swan says that China is in a stronger position than many assumed, as highlighted by with the recent trade tensions around rare earths.

“In recent weeks there has been a back down from the US on some of its trade threats. While this is good news, there still isn’t a permanent long-term solution that’s been agreed, instead, we have seen a delay in addressing the trade issues at hand.

“As it stands, while the tariffs are still there, they are certainly lower than what was anticipated. Importantly, they are in line with some of the tariffs that have been placed on other countries in the region.

“This is not a bad outcome for China compared to what the market feared earlier in the year,” says Mr Swan.

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Stephen Miller

Trump 2.0 remains the focal point as markets head into the second half of 2025. There is greater clarity around the implication of the US administration’s policies on markets, and despite the uncertainty and turbulence earlier in the year, global markets continue to price in a positive outlook for the rest of the year, according to GSFM and its fund manager partners Payden & Rygel, Munro Partners and Man Group.

“The advent of Trump 2.0 was always expected to make for interesting times in financial markets, and analysts who focused on the macro foresaw a dire scenario where tariff announcements would, at the least, make inflation ‘stickier’, pushing the Federal Reserve to adopt a conservative approach to policy rate reductions,” says Stephen Miller, investment strategist at GSFM

“Additionally, a lax approach to the budget deficit, which was already around 6.5 per cent of GDP, was expected to compound an already challenging bond issuance picture and see bouts of market indigestion that would at the very least prevent bond yields from falling and perhaps send them higher,” says Miller.

The recovery in risk markets since the post ‘Liberation Day’ lows in mid-April have been impressive and the S&P 500 has bounced circa 25 per cent from its lows, catching most analysts off guard, says Miller.

“Some of those elements have unfolded largely as anticipated but in some important respects elements of that scenario have gone awry.

“First, there is the ‘TACO’ (Trump Always Chickens Out) phenomenon, where the administration has walked back some of the more severe elements of the ‘Liberation Day’ announcements. Second, there is very little evidence in the hard data that the ‘stagflation-lite’ scenario is a clear and present danger. Inflation has been more quiescent than anticipated and activity has been more resilient.

“And lastly, macro-focussed analysts understandably tend to give substantial weight to macro variables such as interest rates, bond yields, and budget deficits, which underplay structural elements that can be big drivers of equity market performance.

“There is still a chance that inflation will prove ‘sticky’ and activity growth will be challenged but there are some big structural themes at work at the moment, like the rise of AI and technology, climate change, demographic shifts, deglobalisation and oligopolisation. These structural influences can have profound effects on equity market performance and when that is the case it is a particular opportunity for skilled stock-pickers,” says Miller.

Eric Souders, director and portfolio manager at Payden & Rygel, says that despite greater clarity around US policy developments and positive market sentiment, wage growth, labour market strength, and both nominal and real levels of growth in the US are all pointing to a slowing US economy.

“Compared to Q1 2025 trajectory, the US economy appears to be slowing. Wage growth has declined from mid to low single digits. The labour market has cooled, evidenced by a decline in job openings and less wage pressure. Inflation has also declined. The net result is nominal GDP likely in the three to four per cent range, which should slow nominal spending, corporate revenue, and corporate profits absent margin expansion.

“The US economic slowdown is happening in conjunction with a US policy mix that remains growth negative, given the combination of tariffs, immigration, and fiscal policy. To that end, a reacceleration in the US economy would likely require further easing in financial conditions, relaxation of the growth negative policy mix, or a productivity boom,” said Souders.

All the while, markets do not appear to be assigning much likelihood to a growth slowdown, which Souders says is particularly evident in equity pricing and 2026 earnings expectations.

“The US equity market is currently pricing in a very optimistic economic outcome, with forward multiples near all-time highs at 24x. Additionally, earnings growth expectations are suggestive of a strong economic outcome, particularly in 2026, where earnings growth expectations are near 13 per cent. The US interest rate market appears to be pricing an outcome that is more consistent with a soft landing, with two cuts from the Fed expected in the next six months.

“In general, fixed income yields in the five to six per cent range look attractive, particularly when compared to other markets that appear expensive, such as equities.

“With respect to portfolio positioning, we remain modestly cautious on price risk in credit given market pricing relative to the potential range of economic outcomes. Our favoured exposure within credit is emerging market debt and prime areas within the consumer category, such as US housing. We remain more cautious on the subprime consumer cohort and cyclical portions of the corporate sector, such as energy.

“Within interest rates, we are overweight interest rate duration relative to historic averages, and currently prefer more duration outside of the US, specifically in emerging markets, and are considering other developing markets like Canada and Europe. We also think the US dollar remains overvalued despite the 10 per cent plus weakening post Trump election,” says Souders.

With the US administration paying attention to whether the US economy will end up in recession, and what the domestic effects of the tariff agenda might be, Nick Griffin, chief investment officer at Munro Partners, says this strengthens his case to remain bullish about the US equity market heading into the second half of 2025.

“We remain bullish on the US equity market and believe US exceptionalism will resume and there are several indicators supporting this.

“Firstly, the US imposed tariffs were quickly rolled back to reduce the level of damage to the US economy. Secondly, we expect further rate cuts from the Federal Reserve, as hard economic data in the US is clearly slowing, and lower interest rates create a positive environment for growth equities.

“Lastly, and most importantly, fundamentals, specifically areas such as artificial intelligence, climate change and security, are all continuing to benefit from further investment, and in many cases investment in these areas is accelerating.

“What we are also seeing coming through are some of those structural changes that we believed existed for markets in 2025 driven by the Republicans winning the US election. These include the Big Beautiful Bill’s tax cuts, and also strong M&A and capital market activity, evidenced by several IPOs being offered to investors, and the subsequent strong performance of these listings.

“As we move into the second half of 2025, these structural changes will continue to evolve around us, presenting opportunities to invest in earnings growth.

“In particular, we believe more opportunities for investment will become apparent at the application layer of the AI stack. Companies are rapidly advancing the use of AI in their businesses, and as such we believe over the next several years more AI applications will be created,” he says.

Man GLG Asia Opportunities Fund portfolio manager, Andrew Swan, says the US tariffs have created an added layer of complexity in Asian markets, however a weakening US dollar and AI are contributing to a more favourable outlook for this market.

“The US-China trade tensions may see companies shift production bases to lower-tariff areas, which could lead to stockpiling in developed markets. Economic outcomes will depend on US-China trade negotiation results, as each industry tackles tariffs differently.

“China and Southeast Asian nations are expected to be some of the most affected by US tariffs, as Asian nations export heavily to the US. However, a weaker US dollar could help emerging nations in the region.

“Emerging markets are expected to do relatively well when the US dollar is weak. It provides a capital inflow into the region, particularly into the high-yield economies and it also allows central banks in the region to cut their short-term interest rates because the fear of currency depreciation and the inflationary impact of that starts to subside.

“That perhaps explains why markets in Asia have been resilient and continue to push to new record highs despite global politics, US tariffs and general weakness. The tailwind of a weaker US dollar is starting to permeate through markets.”

But he said this time around, China is very much exposed to the weakening US dollar.

“Chinese policymakers have been putting currency stability as number one priority for the past 18 months or so. That means running high real interest rates versus where perhaps the economy should be. So, anything that happens in the US is quite important for easing financial conditions in China, and more so than what we’ve seen in the past.

“It is a positive for the whole region, not just the smaller economies, but also the larger economies. And if perhaps this period of a weak dollar will persist, it will be a nice tailwind for the region,” he said.

According to Swan, the next phase of artificial intelligence (AI) could also benefit Asian economies and their stock markets.

“So far AI has been very helpful upstream in semiconductor companies, but we do expect that demand to now move downstream in the coming year or two.

“Whether we are talking about laptops, smartphones or other devices, once AI-driven innovation spreads to electronics manufacturing and stimulates product development, that will really benefit many Asian companies,” said Swan.

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Andrew Swan

Asia will continue to show resilience in the face of evolving global trade dynamics, given several tailwinds supporting the region’s growth prospects, according to Andrew Swan, portfolio manager at Man Group.

While the US tariffs remain a key concern, China’s economic shift, a weakening US dollar, growth of the tech sector and monetary policy changes are supporting this regions’ growth outlook, Swan said.

“China’s transition of its economic model from an investment-driven growth model to a more consumption-driven economy is a critical factor in its growth outlook.

“The Chinese government is focusing on improving social safety nets, which is expected to unlock significant household savings and stimulate domestic consumption. This is not just short-term stimulus measure by the Chinese government, rather a long-term shift in how China wants to grow,” Swan said.

Beyond China, other markets in Asia, such as Indonesia and the Philippines are also presenting promising opportunities, which Swan said is being supported by the rate cutting cycle by the Federal Reserve (Fed) and a weakening US dollar.

“A strong US dollar historically correlates with Asian market underperformance. But with a weaker US dollar emerging, the outlook for the region is improving.

“In addition, many Asian economies have aligned their monetary policies with the US to avoid currency depreciation and capital flight. With the expectation of further rate cuts by the Fed, this will allow Asian central banks to ease monetary policy, stimulating economic growth and corporate profitability.

“Although Indonesia is having a tough time due to political concerns, as the Fed cuts rates further, the economy should reflate, which makes this market look very attractive,” he said.

According to Swan, the next phase of Asia’s tech growth will be supported by AI innovation and implementation which will be another key growth driver for the region.

“AI will play an important role in the region’s next phase of growth, particularly in consumer devices. As AI continues to be integrated into products like smartphones, tablets, and PCs, there will be a significant upgrade cycle underway.

“I believe that this is the year where consumers will be motivated to upgrade their devices, as AI integration is executed into these devices and users with be provided with greater efficiencies and functionalities than ever before,” he said.

Swan said the investment landscape in Asia looks very favourable for investors.

“We are at a very important inflection point here, which the region hasn’t been in for some time.

“China’s economic pivot, Fed rate cuts, and growth in the tech sector are all tailwinds that are driving growth in Asia. In our view investors should be looking to this region for their next leg of growth and now is a better time than ever.” said Swan.

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Stephen Miller

Global markets are showing signs of positive sentiment heading into 2025 but geopolitical uncertainty and the impact of the incoming Trump administration are the wild cards, according to GSFM and its fund manager partners Payden & Rygel, Munro Partners and Man Group.

GSFM investment strategist, Stephen Miller, says that much of the Trump Administration’s agenda – including the proposed tax cuts and deregulation – will provide a tailwind for equity markets. However, the risk for investment  markets, reflecting that same agenda, is the prospect of higher bond yields. Those higher yields may attenuate the potential gains in equity markets.

“A key factor is the already gargantuan US budget deficit. Given the prospect of large corporate tax cuts it now seems certain that bond investors will be asked to swallow the enormous amount of bond issuance that is needed to fund a budget deficit of such an extraordinary magnitude. In so doing the bond market will likely develop episodic and potentially severe bouts of indigestion that have the potential to send yields higher.

“Certainly, Trump 2.0 has undertaken to embark on a high grade weaponisation of trade that will fuel inflation via aggressive tariffs. That will inevitably result in a spike in inflation and bond yields.”

Domestically however Mr Miller says it is unlikely that Trump’s tariffs will have a meaningful impact on Australian inflation and, by extension, the RBA policy rate.

“Trump’s policies are inflationary for the US. But they will have a barely perceptible impact on inflation in Australia. That is the case even if China and others retaliate.

“My view is that better than anticipated progress on inflation will see a rate cut from the RBA will in February.”

“As with 2024 there are mega forces at play, particularly in the AI / technology area, that might power the performance of selected sectors. That might well be a boon for active managers. Equity markets had a stellar 2024 despite the US 10-year bond yield ending the year higher than the level at which it started the year,” Miller says.

Eric Souders, director and portfolio manager at Payden & Rygel, says the starting point for the Trump administration today is markedly different than it was in 2016.

“Since 2016, the fiscal deficit has increased substantially in the US. Inflation is well above 2016 levels and remains above the US Federal Reserve’s (the Fed’s) target. The US does not need growth today, in fact growth likely needs to abate,” he says.

He believes the policies under the Trump 2.0 administration will likely be more balanced.

“This time around the US economic cycle is wage driven as opposed to credit driven. Nominal wages are stable and healthy, with growth at 4-6 per cent for nearly eight straight quarters. Real wages have risen in recent quarters, increasing purchasing power. The labour force structure is also different, as we have the highest prime working age employment in 25 years. This drives spending.

“Financial conditions are not tight and asset prices – including equities, US housing and credit spreads – are at all-time highs.”

Looking ahead, Mr Souders says there are clear areas of opportunity and areas to avoid in fixed income in 2025.

“Corporate credit, namely high yield bonds and bank loans, should perform well given pro-corporate policies from the Trump administration.

“Commercial mortgage-backed securities (CMBS) are vulnerable given sensitivity to long-end interest rates and bond valuations that look less appealing given credit spread tightening in 2024.

“Emerging markets will be a mixed bag given expectation for higher interest rates and currency volatility,” he says.

Commenting on global markets, Munro Partner’s portfolio manager Qiao Ma says: “The bull market which began in 2023 is entering its third year, but there is still a significant valuation gap between smaller companies and their mega-cap counterparts, presenting compelling investment opportunities.”

To buffer against volatility she is focused on diversifying into structural tailwinds and thematics including decarbonisation and security.

“We are in the first innings of attempting to decarbonise the future of our planet. Our focus is on installed nuclear power, gas turbine manufacturers, and companies involved in the build-out and maintenance of the electrical grid.

“Hyperscalers like Microsoft and Amazon making these large investments also have the strictest net zero carbon pledges.

“Our expectation is for global demand for data centres to more than double over the next five years, driven by hyperscaler and tier 2 cloud customers building out the necessary infrastructure for AI training and inference.”

On the defence thematic, Ms Ma says threat environments are continuing to grow globally from both active military conflicts and from attacks on the cyberspace.

“Threat deterrence via technological superiority is a high priority for all nation states, as we are seeing more companies focused on this space with earning growth potential.

“European defence budgets are increasing, with many nations now lifting their spending levels. Elsewhere, US homeland security spending is likely to increase as the new government seeks to secure the border and keep the cities safe, fulfilling stated election promises,” she says.

Man GLG Asia Opportunities Fund portfolio manager, Andrew Swan, says while developed market valuations continue to climb, Asian equities have been largely overlooked by investors.

“We see a turning point with several tailwinds suggesting a potential resurgence in earnings and share price growth across the region.

“Anticipated interest rate cuts by Asian central banks are expected to invigorate equity markets. Additionally, fiscal reform and a focus on stimulating domestic consumption in China point to a positive shift in the world’s second-largest economy. Furthermore, the forthcoming infrastructure and devices cycle, fuelled by AI advancements, is likely to disproportionately benefit Asia’s hardware manufacturers.

“While Asian equities have been undervalued for an extended period, the combination of these factors can create compelling opportunity for investors. We believe the region’s inherent resilience, coupled with anticipated policy changes and technological advancements, paints a promising picture for the future,” says Mr Swan.

“Tight financial conditions have weighed on Asian markets, but there’s a strong case for optimism. As we anticipate a shift towards looser monetary policies these markets are poised for a significant rebound.

“This presents an attractive investment opportunity. Smaller economies like Indonesia and the Philippines, which have demonstrated solid corporate earnings growth, may be well-positioned to benefit,” he says.

The recent appreciation of local currencies, especially in Indonesia, also signal the start of this positive trend, Mr Swan adds.

“Investors seeking growth opportunities in a dynamic and evolving market would be wise to consider an allocation to this region. As Man Group’s analysis indicates, the tide is turning for Asian equities, presenting a compelling investment narrative for the foreseeable future.”

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Andrew Swan

While developed markets continue to climb led by the US, Asian equities have been largely overlooked by investors. However, Andrew Swan, head of Asia equities (ex-Japan) at Man Group, sees a turning point with several tailwinds suggesting a potential resurgence in earnings and share price growth across the region.

There are several key factors driving this positive outlook. Anticipated interest rate cuts by Asian central banks, following the US Federal Reserve, are expected to invigorate equity markets. Additionally, fiscal reform and a focus on stimulating domestic consumption in China point to a positive shift in the world’s second-largest economy. Furthermore, the forthcoming infrastructure and devices cycle, fuelled by AI advancements, is likely to disproportionately benefit Asia’s hardware manufacturers.

“While Asian equities have been undervalued for an extended period, the combination of these factors can create compelling opportunity for investors. We believe the region’s inherent resilience, coupled with anticipated policy changes and technological advancements, paints a promising picture for the future,” said Mr Swan.

“Tight financial conditions have weighed on Asian markets, but there’s a strong case for optimism. As we anticipate a shift towards looser monetary policies and interest rate cuts these markets are poised for a significant rebound.”

This presents an attractive investment opportunity for investors. Smaller economies like Indonesia and the Philippines which have demonstrated solid corporate earnings growth may be well-positioned to benefit, according to Mr Swan.

Analysis from Man Group reveals that the valuation discount in Asian equities has persisted for several months, raising the question of why now is the turning point. The answer lies in a combination of factors that create a compelling case for renewed investor interest.

“Firstly, the anticipated easing of monetary policies across Asia, triggered by the US Fed’s pivot, will likely stimulate economic activity and boost investor sentiment. This combined with the region’s relatively low inflation rates creates a favourable environment for equity market growth,” he said.

“Secondly, China’s policy shifts towards targeted fiscal easing and reforms in China’s household registration system signal a commitment to sustainable growth and increased domestic consumption. These initiatives, coupled with the potential monetisation of rural land, could unleash a wave of consumer spending, further bolstering the region’s economic outlook.

“Finally, Asia’s strong foothold in the technology sector positions it to capitalise on the upcoming infrastructure and devices cycle. The advent of AI-enabled devices is expected to trigger a wave of hardware upgrades, benefiting manufacturers in particularly Taiwan, South Korea, and China.

“We believe that the combination of attractive valuations, improving economic fundamentals, and the potential for significant technological advancements makes Asian equities an attractive investment proposition,” said Mr Swan. “With valuations currently low by historical standards, investors who are willing to take a long-term view could be well-rewarded,” said Mr Swan.

The chart below illustrates that Asian equities are trading cheaply relative to its history and other regions, notably the US.

The recent appreciation of local currencies, especially in Indonesia, also signal the start of this positive trend, Mr Swan added. “Investors seeking growth opportunities in a dynamic and evolving market would be wise to consider an allocation to this region. As Man Group’s analysis indicates, the tide is turning for Asian equities, presenting a compelling investment narrative for the foreseeable future.”

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Nick Griffin

Interest rates could rise in the months ahead in Australia, inflation proving especially intractable in Australia, while US technology stocks are likely to continue rallying which could underpin growth in Asian markets biased towards the technology sector, according to GSFM and its fund manager partners Man GLG and Munro Partners.

While the United States (US) is looking at cuts in interest rates in coming months, the circumstances in Australia are different and do not warrant any rate cuts, according to GSFM investment strategist Stephen Miller. Inflation remains relatively high and sticky, which raises the possibility of the Reserve Bank of Australia (RBA) raising the policy interest rate in August.

“The current RBA forecast issued in May is for trimmed-mean inflation in the year to the June quarter to be at 3.8 per cent. That was upwardly revised from the previous forecast in February. That forecast is likely to be exceeded when the June quarter CPI is released on 31 July, and a ‘4 handle’ is a distinct possibility,” Mr Miller says.

“I think that makes an interest rate hike in August more likely than not.

“Inflation in Australia is proving more intractable than in the US, in part reflecting the more cautious approach to raising the policy rate to tackle inflation. The RBA Governor Bullock has noted that the Board needs ‘a lot to go its way’ to get inflation back to target in a manner consistent with the RBA’s inflation projection. My concern is that ‘a lot is going the other way’,” Mr Miller says.

Turning to US markets, Mr Miller believes that while positive tailwinds from AI might persist and indeed  be supported by Fed easing, there are some nascent risks on the horizon. In large measure associated with huge levels of US government debt.  Unfunded corporate and income tax cuts under a Trump administration may provide a fillip to the economy but that may prove a temporary ‘sugar hit’ as bond yields will likely stay high given the already gargantuan US budget deficit.

“Even if a Trump Administration were to emasculate the US Federal Reserve, making the policy rate a more ‘political’ device, the economic support from such a measure will likely be mitigated, if not frustrated entirely, by higher inflation expectations and higher medium and long-term bond yields,” Mr Miller said.

“The positive valuation environment currently underpinning markets leaves it vulnerable to episodic bouts of volatility where investor conviction comes under strain. The forgoing underscores perhaps the most important and over-arching principle of investing: diversification. That doesn’t just mean via security selection within a particular asset class or sector but also diversification away from both bond and equity risks within multi-asset portfolios,” he says.

Nick Griffin, CIO at Munro Partners, says moderating inflation and the prospect of policy rate cuts are providing a more positive environment for growth equities. He expects US shares to rally whoever wins the US election.

“From an earnings perspective, we continue to see robust growth from AI-related spending driving earnings upgrades for some companies. Over the last quarter, we continued to pick up more data points suggesting that the market is underestimating the long-term potential for earnings growth for the AI enablers. We maintain conviction in this area and see it as the beginning of a multi-year growth runway,” Mr Griffin says.

“As the year progresses, we foresee the market broadening out with a gradual economic recovery later in the year and a focus on the US Presidential Election. Our industrial names such as Schneider Electric and GE Vernova may benefit from an economic recovery, and we will look to broaden our portfolio as and when we see the catalysts for this,” Mr Griffin says.

He notes that Microsoft has guided for an increase in capital expenditure (capex) for every quarter over the past year. “We anticipate this to continue along with their peers, with the peak somewhat off, given we are still in the early innings of an accelerated capex cycle. This bodes well for continued earnings upgrades for high performance computing names such as Nvidia, with a large proportion of the hyperscaler capex coming in the form of Nvidia GPUs for data centres,” he says.

Andrew Swan, head of Asian equities (ex-Japan) at Man GLG, says the technology rally in the US will likely benefit some Asian markets. “The region’s larger tech manufacturers are beginning to see the benefits of AI tech demand moving downstream to AI enabled devices. Asia is disproportionately skewed towards component and device manufacturers so as this trend plays out, we would expect to see a meaningful pickup in demand,” Mr Swan said.

In China, however, he says the economy remains weak.

“On the positive side, external demand appears robust, driven in part by a recovery in capex but also by the efforts made by Chinese companies to expand their geographic client base in the face of ongoing trade tensions with US and Europe. China has worked hard to enhance its exports with other nations and regions, and this appears to be proving successful.

“On the other hand, domestic consumption remains challenged, with more work required to address excess property inventory before we can see any meaningful improvement,” Mr Swan says.

“The third plenum and Politburo economic meeting remain key in terms of seeing an improved policy response to the current issues we see around the lack of reflationary forces and property stimulus. I think for China to navigate this challenging environment around deflation, the market expects more policy support on the demand side of the economy, particularly around consumption. And this is where I think there is some hope, particularly with regards to rural land reform and Hukou reform.

Mr Swan remains focused on bottom-up stock picking in Asian markets. “Within the portfolios, we continue to reduce our exposure to momentum. Key relative exposures on a sector basis include overweights in healthcare, communications services and utilities versus underweights in energy, consumer discretionary and staples. By market, we are overweight in China and Indonesia, equal weight in India, and underweight Taiwan and South Korea,” he said.

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Andrew Swan

While investment opportunities in global share markets hinge on a number of factors, such as artificial intelligence and resilience in corporate earnings, the Australian market continues to be a source of high dividend yields and has the potential to be a strong relative economic outperformer, according to GSFM fund manager partners Munro Partners, Man GLG and Tribeca Investment Partners.

Factors including developments in artificial intelligence (AI), relatively robust consumer spending, and companies being able to maintain discipline on their cost structures, will be key for investors in global equities.

Munro Partners portfolio manager, Qiao Ma, says that the long term interest rates have peaked in October 2022, and the Munro team is observing encouraging signs of the start of corporate earnings re-acceleration.

“Clearly we are not completely out of the woods yet with sticky inflation and further rate hikes expected over the next few months, so we stay very vigilant with risk management,” she says.

“However, we have seen the earnings growth trajectory picking back up over the past few months.  Consumers have been more resilient than expected, especially around the trends such as health and wellness. The start of AI super-cycle will likely accelerate the rate of innovation across many industries for years to come. In the second half, we also expect good performance from the industrial companies driven by spending plans in the US, including the Inflation Reduction Act and the CHIPS Act.

“It is heartening to see that the market has been returning to a more normalised environment, where share prices follow earnings. This bodes well for our process of looking for earnings growth opportunities backed by a structural tailwind.

“Our portfolio is exposed to the many different idiosyncratic growth drivers, such as AI, resilient consumers, as well as industrial companies benefiting from de-carbonisation.  We are well positioned for the second half of 2023 and beyond,” Ma says.

Man GLG’s head of Asia (ex-Japan) equities, Andrew Swan, says he is also watching developments within generative AI closely, on the expectation that they may kick off a new investment cycle, with associated productivity gains driving better than expected economic growth.

“The equity market has been quick to revalue the entire tech hardware supply chain in Asia in hopes of a new tech cycle as evidenced by strong price performance of the sector. 

“We recognise that the use cases for AI are evolving rapidly and believe this may potentially act as a catalyst to start another tech hardware cycle.

 “We expect South Korea and Taiwan to be the main beneficiaries of this shift – both markets play a vital role in the tech hardware supply chain and are home to some the world’s largest electronics and semiconductor manufacturers.

“Semiconductors have been our preferred means to access the AI value chain so far. 

 “Opportunities in China appear less clear at present, however, and that may have earnings implications for both companies developing AI capabilities and those supplying AI hardware globally,” Swan says.

Locally, Tribeca Investment Partners lead portfolio manager, Jun Bei Liu, says while the Australian market might take comfort from an expected end to rate hikes, investors will have to deal with a slowdown in economic and earnings growth as tightening liquidity conditions finally take their toll on household spending and on business activity and hiring.

“It is usual for equity markets to weaken into recessionary conditions, but while the near-term risk-reward outlook suggests some caution, we do not expect to see a deep or prolonged downturn.

“The good news is that a lot of the valuation de-rating as a response to rising rates has already taken place with many areas heavily discounted since the start of interest rate hikes back in the second quarter of 2022. Provided bond yields don’t have a lot more upside and the growth slowdown is relative short and shallow, then the need for further valuation de-rating at a broad market level is not necessary.

“In addition, Australian corporates are well capitalised having refinanced or issued debt during the COVID-19 pandemic period at rock bottom rates which should provide some protection should financial conditions materially change.

“More importantly, uncertain, and volatile markets are about seeking out the most attractive relative value opportunities and we are less focused on the direction of the market than we are on stocks that have been overly discounted because of macroeconomic uncertainty.

“Longer term we think the broader market can recover from any near-term cyclical weakness as solid economic supports cushion against downside risks such as strong population growth and elevated commodity revenue, and corporates manage costs into a weakening demand backdrop.

“Australia still has one of the highest dividend yields on offer and, downturn or not, Australia has the potential to be a strong relative economic outperformer. We think market dislocations will be short lived and that any weakness over coming months will be an opportune time for active managers to pick over stocks and position for the start of the next upswing,” Liu says.

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Andrew Swan

China’s about-turn on its COVID restrictions late last year has had profound impacts on its economy and those of the Asian countries that trade closely with it.

Federal Treasurer Jim Chalmers went so far to say that China’s slowing growth was one of the major economic challenges facing Australia at the start of 2023.

The impacts of COVID in China have been real and terrible for many; however we are optimistic that an open China will ultimately be good for economic growth and we believe the Chinese economy will recover this year. It will be in the coming weeks and months that we will get a much better feel for what that recovery will look like.

Chinese economy

With regard to a Chinese economic recovery, we see the potential for two main options playing out. It will be either a strong, broad recovery or a narrow, shallow recovery.

We at Man GLG are in the slower recovery camp. The argument that the general public has been saving during the pandemic, and therefore has much pent-up demand, is true but most of that household savings has gone into long-term deposits which cannot be immediately spent.

Of those two recovery options, a broad, strong recovery will have global implications through its impact on commodity prices. But even a narrow, shallow recovery will have an impact on global tourism as more people travel.

There is a surge in demand for travel coming. As people have been stranded at home for the past two years, many are now desperate to travel, both domestically and internationally, and forward indictors for all travel are now very strong.

I suspect we’re going to start to see what a post COVID world looks like for China in the second half of February. And it will be a period of time when economic activity picks up for China as economic activity in the West is slowing down.

South Asia

At the same time South Asia is continuing to recover and will benefit from the borders opening up with China as tourism into countries like Singapore, Thailand, Indonesia, and the Philippines, picks up.

Last year many Asian countries, especially in Southeast Asia, acted very independently of what was going on in China and independently of what was going on in developed markets. Many Asian countries actually had a good year when it came to economic growth and returns to equities, which is very unusual in a global downturn.

While there were pockets of strength in South Asia –especially in the smaller economies — now we’re moving into an environment where you have the biggest economy improving, along with smaller economies doing well.

We believe the majority of Asian countries will experience a better economic environment and improving corporate profitability in 2023, which will be good for equities.

Sectors to watch

Given our expectations for a slower recovery, we are looking at companies in the travel, entertainment and restaurant sectors in China, but are very targeted in our investments across all sectors as we do not believe all companies will benefit.

Gaming and tourism

Hong Kong and Macau are likely to be beneficiaries in the first wave of travel, so we like the Macau gaming space. The Macau casinos should do exceptionally well over the next couple of years.

In fact, in December one of the Man GLG Asia Opportunities Fund’s top contributors was Macau casino operator Sands China, which was buoyed by easing restrictions on both the mainland and in Macau. The stock has more than doubled in price since early October when it was granted the renewal of its casino licence.

Countries like Thailand should also benefit from an increase in Chinese tourism, so we have consumption and financials investments in those markets.

Healthcare

We like certain areas of healthcare in China post COVID, as many parts of the sector were deadlocked during COVID and are now in a much better position to grow.

Medical device production and general healthcare should start to improve. In terms of companies to look at, pharmaceutical stock Pharmaron was in the fund’s top five contributors in December as it rallied on growing demand for antipyretics and other anti-viral medication following the steep rise in COVID infections since the start of December.

Automation

Another area of focus in China is automation, which is an industry that has historically been growing above GDP but was heavily impacted by lockdowns. Not only did demand drop, but production capacity during COVID was impacted as well. A return to normal production in 2023 for automation should see corporate profitability improve across the sector.

Insurance

The other area we like is insurance, which has been through some extremely tough times. It should benefit from the restructuring in the sector over the last couple of years as well as the overall economic recovery which will improve the potential to sell insurance products to households.

In December, insurance groups AIA and Ping An were two of the top five contributors to the fund’s outperformance as they also continued their strong run on the back of improving financial conditions and support for the earnings outlook due to China’s reopening.

Looking forward

The next month will be crucial in understanding the economic fate of China, along with that of the rest of Asia, which leans so heavily on it. As the weather warms up in the weeks following Chinese New Year, we should start to get a good sense of whether this is the developed market post COVID model that we should be looking at – i.e. one where consumption booms as consumers use up COVID savings – or whether it’s a China-nuanced recovery.

If it is a broad recovery, then tourism dollars will be flowing around the world, investment will pick up, and that will in turn drive demand for commodities. If supply remains restricted, then it could also be inflationary for the rest of the world. That could cause problems as developed market central banks are still grappling with trying to use monetary policy to bring inflation under control.

Whatever the outcome, there are still good equity opportunities in China, and Asian countries that trade with China, for the astute investor.

By Andrew Swan, portfolio manager

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GSFM Responsible Entity Services Limited 48 129 256 104 AFSL 321517 (GRES) is the responsible entity of the Man GLG Asia Opportunities Fund ARSN 658 645 026 (the Fund). The Fund is registered as a managed investment scheme under the Corporations Act 2001 (Cth). GRES has appointed GLG Partners LP (GLG LP) as the investment manager of the Fund. Class A Units in each Fund are available for issue by GRES, as responsible entity of the Fund. The information included in this update is provided for informational purposes only. The information contained in this update reflects, as of the date of publication, the current opinion of GLG LP and is subject to change without notice. Before making an investment decision in relation to the Fund, investors should consider the appropriateness of this information, having regard to their own objectives, financial situation and needs. Prospective investors should read and consider the product disclosure statement for the Fund dated 2 September 2022 which can be obtained from www.gsfm.com.au or by calling 1300 133 451. GSFM Responsible Entity Services has produced a Target Market Determination (TMD) in relation to the Fund. The TMD sets out the class of persons who comprise the target market for the Fund and is available at www.gsfm.com.auPast performance information given in this document is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance. None of GRES, its related bodies or associates nor any other person guarantees the repayment of capital or the performance of the Fund or any particular returns from the Funds. No representation or warranty is made concerning the accuracy of any data contained in this document.

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Stephen Miller

Local and global equity markets – in particular Chinese and Asian equities – are positioned well for 2023, but inflation is the joker in the pack for investors, according to GSFM and its fund manager partners Tribeca Investment Partners, Man GLG and Tanarra Credit Partners.

A more positive inflation picture in the United States (US) may provide a more positive environment for US financial assets, but recession looms as a key risk even if China re-opening helps mitigate that risk somewhat, according to GSFM investment strategist Stephen Miller.

“Locally, the inflation portents aren’t so encouraging, and that may result in some headwinds to local market performance for both bonds and equities.

“The RBA and local interest rate markets continue to underestimate inflation momentum and the attendant policy rate implications.

“High frequency data continue to indicate significant domestic inflation momentum as we go into 2023. The unemployment rate remains close to a 50 year low.

“Well-intentioned but potentially flawed changes to the regulatory environment, particularly in relation to the wage-setting framework, run the risk of entrenching higher inflation in Australia compared to elsewhere.

“Against that background, the Reserve Bank of Australia (RBA) should be possessed of an acute inflation anxiety in its approach to policy settings through 2023. The inflation impact will be the wildcard for investors in the year ahead,” he says.

Managing director of Tanarra Credit Partners, Graham Lees, agrees there is a high level of economic uncertainty for investors to contend with.

“The global outlook remains challenging with a multitude of economic and market indicators signalling that elevated levels of market volatility are likely to persist. Ongoing geo-political events in the Ukraine  add to the uncertainty with implications for energy and food prices, as well as global supply chains.

“Locally, we are yet to see the full impact of rising interest rates, and the flow-on effect this will have on household behaviours and consumer spending. It is also not clear how far interest rates will need to rise to curtail inflation, but we believe Australia is relatively well placed compared to other economies.

“In this environment, private credit investments – particularly those with a senior security ranking and that are floating rate – provide protection against both inflation and rising rates and represent a safe haven investment.

“There is a significant opportunity in Australian private credit and we expect the strong level of deal flow to continue in the current environment.

“Private credit across the Asia-Pacific region has a long growth runway that can be levered over the coming years, given its relative under-penetration against more mature, offshore markets,” Mr Lees says.

Man GLG Asia Opportunities Fund portfolio manager Andrew Swan says the next few months will be important in determining how China is going to emerge from its post COVID-19 era.

“I would say in the next month we’ll start to get a sense of whether this is a strong, broad recovery or a narrow, shallow recovery.

“A broad, strong recovery will have implications for the rest of the world, in particular commodity prices. But if it’s a narrow, shallow recovery, there probably won’t be any impact on the rest of the world, apart from more Chinese tourism into other places.

“There is definitely a surge in demand for travel coming, which makes a lot of sense, given people have been locked into local cities now for a few years. We’re seeing very, very strong forward indications on both domestic and international travel.

“We do believe the Chinese economy will recover but we are more in the narrow, shallow recovery camp than the broad, strong recovery camp. If you look at what has built up in terms of household savings, it’s all gone into long-term term deposits. Normally if you’re making that decision, you’re locking your money up, you’re not really thinking you’re about to spend it anytime soon,” he says.

Tribeca Investment Partners lead portfolio manager, Jun Bei Liu, says we can expect a period of weaker economic and earnings growth before a new upswing can begin.

“On a positive note, Australia is well positioned to ride out an economic slowdown, and while it will not be immune to rising rates and tighter liquidity conditions, it should avoid recession due to the benefit of a much weaker Australian dollar, ongoing strength in the labour market, supportive commodity prices (and volumes) as well as a temporary downturn in consumer spending.

“At a corporate level, we expect to see meaningful cuts to earnings expectations as the combination of rising costs and weaker demand begins to pressure margins.

“In the absence of a deep global or domestic economic slowdown, we think earnings downside should be modest with most corporates well positioned to navigate a short-term decline in demand,” she says.

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