Monthly Review – January 2025
OUR PERSPECTIVE
“Only when the tide goes out do you discover who’s been swimming naked.” ~ Warren Buffet
“The investor’s chief problem — and even his worst enemy — is likely to be himself.” ~ Benjamin Graham
A new year brings new ideas, fresh visions, and renewed promises. This is particularly true in 2025, as governments around the world strive to fulfil the commitments they made to their electorates over the past year.
As the charts below highlight, the dominance of passive investing has turned into a one-way massacre for active managers, killing price discovery and making it increasingly difficult for active managers to generate better risk-adjusted outcomes for clients. While regulation have played a major role, the real drivers are human behaviour — narratives and inertia. The rise of passive has created a feedback loop that further weakens the ability of active investors to generate alpha. The sheer scale of capital moving into passive strategies distorts market signals, reinforcing trends rather than rewarding fundamental value.
One of the most striking narratives today is that of ‘U.S. exceptionalism’. Despite the world knowing this is a fallacy, capital continues to flow relentlessly into U.S. markets at the expense of all others. The ultimate momentum trade. Call it long-termism, buy-and-hold, or the AI-revolution — it’s all the same song. But when the music stops, the door is only so big. The increasing concentration of market capitalisation in a handful of names exacerbates the risks. Liquidity can be an illusion in such an environment, as recent history has demonstrated.
We caught a glimpse of this in late January. The China-related news that sparked a sudden sell-off wasn’t even particularly bad, and positive conclusions quickly resulted in a rebound. But in those brief hours, billions were wiped out, reminding us of the fragility lurking beneath the surface. Momentum stocks plunged 4% in minutes, while value stocks remained largely indifferent to the chaos in ‘imagine-land.’ The rapid nature of these corrections underscores just how vulnerable momentum-driven markets have become. It also raises critical questions about whether the passive-driven concentration of capital is creating a house of cards rather than a resilient market structure.
Regardless, it serves as a important reminder that valuations matter. Growth and opportunity should always be considered, but for non-yielding assets like growth equities, the price at which you buy and sell at, is the sole determinant of your realised returns. Investing requires discipline and an understanding of the true value of an asset. While momentum-driven growth stocks may seem like an easy path to positive returns, their valuations will ultimately dictate their fate when sentiment shifts.
As we navigate this environment, our systematic approach remains focused on adapting to evolving economic regimes while mitigating risks associated with overcrowded positioning. Price, fundamentals, and a robust risk management framework remain our guideposts—especially as the passive tide continues to distort market dynamics. While others chase the prevailing trend, we remain committed to a process that seeks to identify true value and manage risk effectively. By maintaining a disciplined approach, we aim to navigate this environment with a focus on sustainable, long-term performance.
The Pension Protection Act of 2006 (PPA) introduced Qualified Default Investment Alternatives (QDIAs), including passive target-date and index funds. The Act protected employers from liability when automatically enrolling employees in these QDIA funds. Alongside fee disclosure rules introduced in 2012, it massively accelerated the adoption of passive investments over actively managed funds in the $42 trillion U.S. retirement
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| Positioning | Investment Thesis |
|---|
| Fixed Income |
|---|
| DM – Government Bonds | NEUTRAL | Whilst yields in the U.S. Treasury markets are attractive, we note the risks from inflation and term-premia for longer duration U.S. Treasuries. We find short-dated TIPS especially attractive with real rates high relative to history. Duration in Europe and U.K. Gilt markets look more attractive as we believe long-term growth and inflation expectations remain too high. |
| DM – Corporate Bonds | UNDERWEIGHT | The risk-reward profile remains unattractive given tight credit spreads and macroeconomic risks. |
| EMD – Government Bonds | OVERWEIGHT | A strong US Dollar has negatively impacted EM Govt bonds. However, we believe the strong US Dollar trend will plateau out and current valuations reflect most of the negative sentiment. |
| EMD – Corporate Bonds | NEUTRAL | Whilst attractive security specific / RV opportunities exist, EM Corporate Bonds are generally fair value given geopolitical and macroeconomic risks. We prefer high quality, short-duration and hard-currency credit, which offers attractive yields with lower relative risk. |
| Alternatives |
|---|
| Property & Infrastructure | NEUTRAL | We retain conviction behind infrastructure, especially in digital infrastructure and electrification where attractive and sustainable tailwinds persist. Infrastructure that provides long-term CF’s and inflation protection offer attractive opportunities at current levels. Whilst niche / specific property assets with attractive characteristics exist, cap rates and valuations broadly do not reflect a higher interest rate regime we entered post-pandemic. |
| Commodities | OVERWEIGHT | We remain positive on precious metals, in particular gold, as geopolitical and economic uncertainty remains high, with optionality driven policy-missteps and escalating fiscal problems. Near-term supply-demand for industrial metals and the broader energy complex remains uncertain given U.S. policy objective and the global economic growth outlook. |
| Private Equity | UNDERWEIGHT | The risks from rising cost-of-capital and difficulties in refinancing, alongside rising liquidity concerns, are increasing risks we believe not fully reflected in private markets. We remain Underweight. On a selective basis, attractive discounts have opened up, which warrants attention. |
| Alternative Strategies | OVERWEIGHT | Uncertainty behind inflation and economic growth drive the opportunity for uncorrelated investment propositions, e.g. Hedge Funds. However, investors should consider the absolute opportunity relative to T-Bills. Attractive strategy specific opportunities exist with i) lower volatility, ii) uncorrelated profiles, iii) attractive risk-adjusted return expectations, and iv) long-volatility pay-off profile. We are especially bullish on CTA’s and trend-following Managed Futures as a source of diversification. |
| Developed Market Equity |
|---|
| North America | NEUTRAL | US equity market outperformance over the last 15 years have been significantly supported by multiple expansion, and valuations remain elevated on both absolute and relative levels. Despite the longer-term benefits from the AI revolution, we believe risks to profit margins remains significant in the near term. Worth noting that the opportunity in small and midcaps looks more attractive whilst the thematic and secular tailwinds in market leaders remain very robust. |
| UK | OVERWEIGHT | Equity valuations reflect political and economic uncertainty, however alongside continued disinflation we believe risks are skewed to the upside. Whilst we retain a preference for high quality and stability, we note the opportunity in small and midcap companies. |
| Europe ex-UK | UNDERWEIGHT | FX and Stagflation risks remain material in our opinion, as does risks from Chinese exports and U.S. tariffs. Alongside the lack of attractive themes in public markets, we believe risk-reward to be more attractive elsewhere. Whilst attractive security specific opportunities exist, we note a preference for quality and pricing power. |
| Japan | OVERWEIGHT | Attractive valuation, macroeconomic tailwinds and ongoing market reform all underpin the opportunity in Japan. Corporate Japan’s strong balance sheet and low valuations make for attractive risk-reward profile. We believe the Japanese Yen is significantly undervalued, and exposure to Japan should not be hedged. |
| Emerging Market Equity |
|---|
| Asia ex-Japan & China | OVERWEIGHT | We retain a preference for Asian emerging economies over non-Asian EM, driven by better fundamentals and lower reliance on externalities. However, we note the risks of contagion as China embark on a local deleveraging cycle and economic growth slows. India remains one our highest conviction opportunities in the region, but valuations are stretched. |
| China | OVERWEIGHT | Despite increasingly negative news-flow and tariff-risks, we believe negative sentiment towards China is reflected in the price. Question marks with regards to demographics, real estate, debt, policy and alignment remain. However, the risk-reward are too attractive to ignore, and selectively attractive opportunities have emerged. |
| Latin America | OVERWEIGHT | The changing political and macroeconomic environment, specifically the benefits from the ‘near-shoring’ of supply chains and the consequences of deteriorating China-US relations, creates attractive opportunities in Central and South America. Some uncertainty remains in the near term from US-policy and the outlook for global growth. |
| EMEA | UNDERWEIGHT | Preference for Asia & Latin America. |
CONTACT US
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Important information
Shard Capital Partners LLP is a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: Floor 3, 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.