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This month’s market commentary comes courtesy of our own in-house investment management team at Aisa. They share their views on the current investment climate with input from Royal London Asset Management as well.
Market Overview 2025
The past year saw central banks adjusting interest rate policies in response to inflationary pressures and economic growth concerns. While some economies have begun to stabilize, others face challenges from currency fluctuations, supply chain constraints, and regulatory changes. Equities have shown resilience, particularly in technology and energy sectors, while fixed income markets are adjusting to new interest rate environments.
Key Investment Themes for 2025
Diversification and Risk Management
Given ongoing market uncertainties, well-balanced portfolios with strategic diversification remain essential for mitigating risk.
The Changing Role of ESG
Environmental, Social, and Governance (ESG) investing is at a crossroads. The European Union is reassessing its regulatory stance, reflecting concerns that ESG criteria may hinder investment flexibility and economic competitiveness. Meanwhile, the UK government has taken a more pragmatic approach, encouraging investment in sectors such as defence, arms, and banking, regardless of ESG considerations. Across the Atlantic, with Donald Trump as president, ESG and Diversity, Equity, and Inclusion (DEI) initiatives are facing significant pushback, with potential deregulation in sight. Investors should therefore expect greater divergence in ESG-related policies across jurisdictions, creating both risks and opportunities depending on market positioning.
Technological Innovation – Overhyped or a Global Shift?
For some time, we have suggested that markets have been overly optimistic about American technology companies, particularly in AI. This view has been reinforced by the rapid rise of DeepSeek, the Chinese AI breakthrough that has reshaped the global AI landscape. The assumption that the U.S. would maintain its dominance in AI has now been challenged, with other nations proving they can compete at the highest level.
o China’s Strategic Leap
The sudden emergence of DeepSeek highlights China’s ability to rapidly innovate and commercialise AI, signalling that the technological race is far from onesided, and that may not be a bad thing.
o The UK’s AI Potential
With its deep expertise in artificial intelligence and computational sciences, the UK could position itself as a leader in AI development, particularly as it moves away from heavy EU regulation. (More on this at the end as it is a significant point)
o The EU’s Regulatory Drag
While innovation surges elsewhere, the European Union is taking a different path, introducing DORA (Digital Operational Resilience Act) and other bureaucratic measures that could stifle AI development within its borders. The regulatory approach risks leaving European tech companies at a disadvantage in a rapidly evolving market.
The Future of Clean Energy
The global commitment to clean energy is facing significant challenges. Both the United States and China, which together account for approximately 43% of global CO2 emissions (Reference: statista.com), have made only token efforts toward moving away from fossil fuels. In contrast, the UK and certain EU countries are actively pursuing ambitious clean energy strategies. However, these initiatives come with substantial costs, and current technologies may not suffice to meet their targets without significant innovation.
o Investment Trends
Recent data indicates a decline in green investment within Europe. In 2024, the EU saw a 6.5% decrease, while the UK experienced a 12% drop in renewable energy investments. (Reference: ft.com). This might surprise people who believe that there is greater investment happening outside of the state, and this indicates markets do not believe the politicians. This downward trend raises concerns about the feasibility of current clean energy strategies.
o Technological Challenges
The high costs and technological limitations of existing renewable energy sources necessitate breakthroughs to achieve energy transition goals. Without substantial innovation, there is a risk that these strategies may falter in the coming years.
o Policy Implications
Policymakers must balance the urgency of decarbonization with economic realities. Ensuring that the costs of the transition are distributed fairly is crucial to maintaining public support. (Reference: theguardian.com). Failure to do so could lead to a collapse of current clean energy strategies over the next five years.
Fixed Income and Yield Strategies
Interest rate adjustments have created renewed opportunities in bond markets and structured investments, with investors carefully balancing risk and return in the face of central bank policy shifts.
Looking Ahead
With global uncertainty persisting, disciplined investment strategies focused on long-term value creation remain key. The technology sector remains a key driver of growth, but the shifting global AI balance suggests that investors should look beyond the U.S. for innovation opportunities. In the energy sector, the ambitious clean energy initiatives in the UK and parts of the EU require careful monitoring, as their success hinges on significant technological advancements and sustainable investment levels. Staying informed, adapting to market changes, and seeking professional guidance will be critical in navigating 2025’s investment landscape.
Now focusing on the UK; Key points supporting the UK’s potential to still lead in artificial intelligence (AI) development:
- Strong Academic Foundations:
The UK boasts world-class institutions specializing in AI and computational sciences. The Alan Turing Institute, the UK’s national institute for data science and AI, exemplifies this strength. Established in 2015, it collaborates with leading universities to advance AI research both in the UK and outside.
- Thriving AI Ecosystem:
As of 2023, the UK is home to approximately 3,713 AI companies, with 2,204 focusing primarily on AI products or infrastructure. This vibrant ecosystem fosters innovation and positions the UK as a significant player in the global AI landscape.
- Flexible Regulatory Approach:
This again is not controversial and yet any mention of Brexit always generates an emotional response! Post-Brexit, the EU has gone in a certain direction as previously mentioned and it is impacting on companies across the EU (we should know as we have companies there). The UK is crafting a distinct AI regulatory framework that emphasizes flexibility and sector-specific guidelines over comprehensive regulation which is the way of the EU. This approach aims to balance innovation with safety, potentially providing a more conducive environment for AI development compared to more stringent regulatory regimes. (Reference: Multiple, but outside the EU and the UK gtlaw.com.au)
- Government Initiatives and Investments:
The UK government has demonstrated a strong commitment to AI advancement. In 2024, an AI expert was appointed to lead an action plan aimed at harnessing AI for economic growth and public benefit. It is one of the only European governments really seeking to bring AI into everyday state usage. Additionally, the establishment of the AI Safety Institute underscores the UK’s dedication to both innovation and ethical considerations in AI.
These factors collectively highlight the UK’s deep expertise in AI and its strategic positioning to lead in AI development, especially as it navigates its regulatory landscape post-Brexit. Let us hope that the current government does not blow this advantage!
View of Royal London Asset Management
Speaking with us this quarter on behalf of Royal London Asset Management was Richard Marwood, manager of the Royal London UK Equity Income fund, which has been a fixture in our portfolios for a considerable time. Richard gave an update on the UK and European markets plus his broader thoughts for 2025, which have been summarised below.
UK Update
Inflationary pressures are waning, with an expectation for modest interest rate cuts over the next 12 months.
While current economic conditions are not entirely the fault of chancellor Rachel Reeves’ policies, there has been enough of a panic to warrant an adjustment in tactics from the government. So we may see some form of mini-budget in the near future in an attempt to stop the devaluation of the pound.
In markets, general trends have seen investments moving away from the UK over time and this has only intensified in recent months. To ease the selling pressure we will need to see: Overseas buyers, Mergers & Acquisitions, or Share buyback schemes.
While there isn’t complete confidence in the UK, companies in general are doing well despite the negative sentiment. In speaking to companies of varying sizes, the conversation is often the same: ‘NI + operating costs have gone up, and there’s only so much you can do except increase your prices’. Additionally, companies that have the facility to move their business away from the UK, are finding that the costs of a potential move completely outweigh the benefits, so the risk of losing our businesses abroad appears to be low.
UK / Europe vs US
The US is a strange market currently, still very concentrated toward to the top few companies and still showing remarkably high P.E. ratios, but still maintaining growth at a far more appealing rate than most other markets. Whether this growth keeps its momentum is the question for 2025.
Meanwhile the UK market is quite thin and commonly shorted, with investors almost relying on negative news. In cases of good news, e.g. one-off positive earnings reports, you will see sharp and brief upticks in price, which shows that the market is twitchy and waiting for the opportunity to climb again.
Similarly most of Europe has been caught up in a string of various socio-political issues impacting their markets, as well as seeing a huge impact from the China supply chain weakening, leading to indifference from potential investors. As such, substantial growth is not expected from the sector.