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.”)

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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.