As we look ahead to 2025, markets could be driven by several economic and political factors, and there are plenty of unknowns, including the next moves from central banks, the potential for a global economic slowdown, political and geopolitical risks, including tensions between China and the US and wars in Ukraine and the Middle East.

 

Uncertainty isn’t unusual for us as investment managers, however. While we take macroeconomic factors into consideration, we prefer to position the portfolio in a way that we believe can deliver through cycles, rather than taking bets on a particular economic scenario. We also believe in the importance of following a robust investment process with a long-term investment horizon and a well-diversified portfolio.

Asian tech: Enabling the AI revolution

The Asia Pacific (ex Japan) region is home to several world-leading technology companies, and, given recent technological advancements – namely those related to artificial intelligence (AI) – our conviction in the sector has grown stronger. At the start of 2024, we decided to increase our technology weighting in the Jupiter Asian equity income strategy, making technology our largest sector weighting.

 

We hold five tech companies in the strategy – three in Taiwan, one in South Korea, and one in India – each of which we believe is either the best, or among the best, at what it does. We believe these companies complement each other well rather than fighting over market share, meaning that each deserves a place in our portfolio. All five companies have strong balance sheets and offer attractive dividend yields.

 

While there have been some concerns raised about whether the US tech giants will be able to make reasonable returns on their AI investments, the five tech companies we hold are already seeing strong financial returns coming from AI, and this is something that we expect to continue into 2025 and beyond. Furthermore, we believe these companies are trading at attractive valuations, not only on an absolute basis, but also on a relative basis when compared to many US large-cap tech stocks.

Australia: The most attractive developed market in Asia Pacific

Australia is the largest country weighting in our portfolio. We think it is the most attractive developed market in the region, if not the world. It offers one of the highest-yielding equity markets globally; it is a land of oligopolies, with very few state-owned enterprises (SOEs) and no large listed SOEs; its companies generally have strong corporate governance; and it is a fully functioning democracy, with freedom of press and an independent judiciary. Australia’s demographics are also a huge tailwind: its population growth is one of the highest in the world given a combination of migration and natural increase, and its migrants tend to be wealthy and/or skilled, meaning they are likely to be able to contribute to its economy from the moment they arrive.

 

Australia is often underrepresented in portfolios, partly as it is sometimes mistaken for being a commodity dependent country. But in reality, it is home to a number of world-class exporters and to several attractive domestic companies too.

Accessing the best of emerging markets
Given heightened geopolitical tensions and potential flare-ups, we hold a defence company and a gold miner, along with a number of positions in companies that we view as being more insulated from the global economy. These more “remote” opportunities are in India and Indonesia – the second and third largest emerging markets in Asia Pacific, respectively. Both countries have a strong growth outlook, and we believe that they face lower geopolitical risks than other emerging markets in the region, including China.
Avoiding investing in Chinese equities
We continue to have zero holdings in mainland Chinese companies. We do not believe its political system is compatible with strong shareholder returns for foreign equity investors; geopolitical tensions between China and the US, Europe, Japan, India, Southeast Asia and Australia remain, and we believe they are likely to deteriorate further; and its population is shrinking by more than 250,000 per month, a trend which is set to accelerate. We have some limited exposure to China’s economy, however, with around 14% of our portfolio’s revenue coming from China through companies based outside of it.
Dividend increases and earnings growth
Given the economic and political risks, we choose to take a more “neutral” stance as investors, being positioned well across economic scenarios. While we recognise the next leg of this economic cycle could be tougher, we believe our focus on quality income companies means that we still expect to see growth in earnings and dividends coming from the companies that we hold.
Strategy-specific risks
  • Currency (FX) Risk – The strategy can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
  • Pricing Risk – Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
  • Emerging Markets Risk – Emerging markets are potentially associated with higher levels of political risk and lower levels of legal protection relative to developed markets. These attributes may negatively impact asset prices.
  • Market Concentration Risk (Geographical Region/Country) – Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
  • Market Concentration Risk (Number of holdings) – The strategy holds a relatively small number of stocks and may therefore be more exposed to under-performance of a particular company or group of companies compared to a portfolio that invests in a greater number of stocks.
  • Derivative Risk – the strategy may use derivatives to reduce costs and/or the overall risk of the strategy (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
  • Liquidity Risk (general) – During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the strategy.
  • Counterparty Risk – the risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
  • Charges from capital – Some or all of the strategy’s charges are taken from capital. Should there not be sufficient capital growth in the strategy this may cause capital erosion.
  • Stock Connect Risk – Stock Connect is governed by regulations which are subject to change. Trading limitations and restrictions on foreign ownership may constrain the strategy’s ability to pursue its investment strategy.

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