As we ease into 2025, we asked some of the UK’s best-known fund managers to outline what they felt were the risk and opportunities facing markets in the year ahead along with a few of their top sector and stock ideas.

We start with the potential risks the managers see for markets and end on a high note of sorts.

MARKETS HAVE PRICED IN LOWER RATES

‘There are always things to worry about as an investor, but ultimately, it is changing sentiment which creates mis-pricing opportunities in markets,’ says Stephen Anness who manages the Invesco Global Equity Income Trust (IGET).

‘Perhaps the biggest risk is that both 2023 and 2024 surpassed macroeconomic expectations, as an economic ‘hard landing’ never materialised, and markets performed very strongly as a result, which has raised the bar for another year of outperformance in 2025.’

Markets are already pricing some benign outcomes when it comes to further rate cuts from the Federal Reserve and the European Central Bank, cautions Anness, so given what is already priced in, the bar for 2025 is much higher than it was going into the last two years.

Given current valuations, the manager says investors need to keep their expectations in check when it comes to share re-ratings.

‘We expect returns in 2025 to be predominantly delivered from earnings growth and dividends, and this remains a central focus of our work,’ he adds.

That’s a view echoed by Nicolas Khuu, chief investment officer at J. Rothschild Capital Management Limited, which manages RIT Capital Partners (RCP).

‘While 2025 presents a range of familiar risks, such as economic slowdown, fiscal and monetary policy uncertainty, elevated valuations and geopolitical tensions, one underappreciated concern is the potential need for higher interest rates,’ says Khuu.

Asset prices are currently underpinned by expectations of declining rates and stable inflation, but US growth and trade policies, including tariffs and protectionist measures, are fueling domestic demand while accelerating the erosion of globalisation.

‘This fragmentation, combined with globally easing monetary policies, could ignite unexpected inflationary pressures. If inflation surprises to the upside, central banks may have no choice but to raise rates again, creating significant headwinds for global markets and valuations,’ he warns.

THE RETURN OF ‘TARIFF MAN’

Unsurprisingly, many investors are concerned about tariffs – according to the latest Bank of America fund manager survey, 39% of those polled cited a trade war as the most bearish 2025 risk.

Cormac Weldon, head of US equities at Artemis, is less concerned: ‘We’re inclined to believe Trump is likely to use tariffs as a negotiating tool – he is a dealmaker after all – rather than enacting them in full. That said, he has famously described tariff as “the most beautiful word”, so the disruption caused by potential trade wars, similar to last time, should not be underestimated.’

Weldon and his team are looking carefully at importers and at the supply chains of all the companies they hold, screening out companies which are overly reliant on China.

James Cook, co-manager of JPMorgan Global Growth & Income (JGGI), flags the paucity of economic activity outside the US as a concern.

While real wages are rising in Japan, manufacturing sector weakness has been a drag in Europe and domestic demand in China remains sluggish, flags Cook.

‘We recognise that while global equities remain an attractive opportunity for an active stock picker, crucially, it is an environment which pays to be selective with increasing dispersion between regions.’

INCREASING VOLATILITY AND CONCENTRATION RISK

Investors should anticipate more share market volatility, as is typical early in a new technology cycle, says Ben Rogoff, manager of Polar Capital Technology Trust (PCT).

‘This was the case during 1995-1998 – a period early on in the internet cycle which we consider analogous to today – when strong overall sector returns were punctuated by seven 15%-plus pullbacks in the Nasdaq 100.’

Volatility could be caused by macro factors such as geopolitics, interest rates or tariffs, or a negative AI (artificial intelligence)-related datapoint which challenges the near-term narrative, cautions Rogoff.

For Terry Smith and Julian Robins, chief investment officer and head of research at Fundsmith Equity (B41YBW7), the biggest risk is the concentration caused by the rise of index funds, which now represent more than 50% of global assets and are ‘distorting’ markets, the pair warn.

‘Calling index funds or index ETFs a form of “passive” investment is simply wrong. They don’t have a fund manager making stock decisions, they are in fact a form of momentum investing. ‘

As money goes into index funds it is spread on the basis of the market value of the companies in the index, dominated currently by the so-called Magnificent Seven and AI stocks, irrespective of their valuations or fundamental outlook.

This creates demand for their shares, which makes them perform even more, which in turn attracts more money from active funds to index funds, ‘and so the upward spiral goes on, and it will keep distorting markets until something happens to send it into reverse, but we have no idea what that might be or when it may occur,’ warn the duo.

STILL BACKING AI IN 2025

Despite the risk of a negative datapoint, Polar Capital’s Rogoff is still ‘hugely excited’ about 2025, calling the pace of innovation in generative AI ‘like nothing we have seen in our 25-plus years of investing across many technology cycles’.

‘We believe generative AI is the next major GPT (general purpose technology) platform, a rare leap forward in technological capabilities rather than a gradual improvement, which will drive radical innovation, fundamentally changing industries and creating significant new market opportunities.’

He is also excited by the potential for generative AI to turbocharge Polar’s own investment process, with the development of task-specific GPTs for screening, idea generation, analyst productivity, and to verify the team’s analysis.

JPMorgan’s Cook also counts advances in AI as a key area of opportunity for 2025, alongside the shift towards renewable energy.

The trust has added exposure to companies providing memory capacity for computers and smartphones, including SK Hynix (000660:KRX), a Korean-listed market leader in leading edge memory services.

‘The transition to renewable energy sources and electric vehicles will provide further impetus to this growing demand for semiconductors and related tech, and we see many attractive structural investment opportunities in this arena’, says Cook.

The trust also owns US utilities, which are leaders in the energy transition and the use of renewables, such as NextEra Energy (NEE:NYSE).

ESCHEWING THE MAINSTREAM

Artemis’s Weldon has a more contrarian approach, pointing out that sometimes it’s what you don’t own which can help your performance.

Given all the talk around tariffs, he significantly cut the firm’s holding in Magnificent Seven consumer electronics firm Apple (AAPL:NASDAQ) last year.

‘Being a business which relies heavily on China from both a demand and a supply perspective, Apple could suffer under a Trump presidency,’ the manager explains.

On the more positive side, says Weldon, any escalation in trade conflict will accelerate reshoring to the US which should benefit a wide range of industrial and manufacturing companies down the market-cap spectrum which generate the majority of their revenue domestically.

For Rothschild Capital Management’s Khuu, the main attraction this year isn’t the US or AI but Japan.

‘We have decades-long experience in investing via regional managers with proven track records of outperforming the benchmarks. We believe 2025 will be another great year for our managers in Japan as they continue to identify and engage with undervalued businesses benefitting from the ongoing corporate governance reforms as well as unlocking significant value in non-core assets, real estate being one example.’

Predictably, Fundsmith’s Smith and Robins are sticking to their knitting this year just as they have done every year.

‘We are always a bit wary of people’s best ideas, such as so-called Best Ideas Funds and brokers’ lists. Anything which is described as best ideas makes us wonder what the rest of their ideas are like,’ say the duo.

‘Our best idea is also our only idea, which is to keep on doing what we seek to do, namely to own a portfolio of good companies at reasonable valuations. We realize that this may not always outperform the market and it certainly hasn’t in the past few years, but unlike the returns generated from playing AI or crypto or any of the other current chart toppers, it has a high likelihood of delivering a good return rather than the chance of a spectacular return which could of course become spectacularly bad.’

Disclaimer: The author (Ian Conway) owns shares in Fundsmith Equity.

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