Monthly Review – May 2025
OUR PERSPECTIVE
“Financial repression is most successful when accompanied by a steady dose of inflation and an unsuspecting public.” ~ M. Belen Sbrancia, University of Maryland, IMF, and Carmen Reinhart, Chief Economist, World Bank.
Across the developed world, long-term government bond yields are on the rise. From the U.S. to the UK, Germany, France, and even in yield-suppressing Japan, long-term borrowing costs are marching higher. Markets are beginning to reckon with a truth long avoided: government debt has reached levels that no longer square with economic fundamentals, and the consequences for capital markets — and society — will be profound.
As national debts climb and unfunded pension and government liabilities loom larger, governments find themselves trapped. They cannot default. They cannot grow their way out. They cannot slash spending meaningfully without social unrest or political suicide. And so, we move toward the inevitable: debt monetisation, aka financial repression.
Let’s first consider the current trajectory. Rising long-term yields signal a breakdown in confidence. As bond vigilantes return, demanding higher compensation for duration and inflation risk, asset prices across the board suffer. Equities, reliant on low discount rates, falter. Housing markets, built on the back of ultra-cheap mortgages, begin to crack. Private equity, venture capital, and long-duration growth trades, all teeter. For governments, this is no less than a fiscal death spiral: higher yields mean higher interest costs, worsening deficits, and feeding the very fire that ignites more rate pressure.
And this is the inevitable conundrum: the road we are on, leads to a wall of debt, fortified by bond vigilantes. At this junction, there are only two solutions.
First, austerity. But as mentioned, this road is fraught with danger. Not least, there is no incentive for any politician to choose this path.
The alternative? Financial repression — a quiet, systemic transfer of wealth from savers to sovereigns. Through tools like yield curve control, regulated captive demand, and inflation above nominal rates, governments can suppress yields artificially. This comes at a cost: distorted markets, malinvestment, the erosion of trust in fiat currencies, and the slow but certain decimation of real savings.
Gold, the ultimate barometer of distrust, is flashing bright warnings. It’s not just a hedge — it’s a vote of no confidence in the system.
Neither outcome is painless. Austerity brings volatility, price destruction, and inevitable social unrest. The other brings stagnation, stealth taxation, and capital controls. The only certainty is this: the rules of the last 40 years no longer apply.
To navigate what comes next, portfolios must evolve. Capital must be treated as precious and vulnerable. And we, as stewards of wealth, must prepare for a world where money itself is no longer a safe store of value.“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman
Bond vigilantes are investors who sell bonds in response to government fiscal or monetary policies they view as irresponsible, driving yields higher. Their actions act as a market-based check on excessive spending or inflationary policies, signalling concerns about rising debt, inflation, or loss of confidence in a country’s creditworthiness.
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ASSET ALLOCATION
The below tables set out our current tactical asset allocation views and the investment thesis behind these.
| Positioning | Investment Thesis |
|---|
| Fixed Income |
|---|
| DM – Government Bonds | NEUTRAL | Whilst yields in the U.S. Treasury markets are attractive, we note the risks from supply-demand mismatch, inflation and term-premia for longer duration U.S. Treasuries. We find short-dated TIPS especially attractive with high real rates 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, the tide has turned, and we believe the current administration will ensure a weaker US Dollar prevail, whilst current yields reflect most of the negative sentiment. |
| EMD – Corporate Bonds | NEUTRAL | Risks include negative economic shock, FX-mismatch. Attractive security specific / RV opportunities, where 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. We believe infrastructure that provides long-term CF’s and inflation protection offer attractive opportunities at current levels. Property markets remain uncertain and less attractive. Whilst there are perhaps niche / specific property assets with attractive characteristics, 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 by policy missteps. Whilst sustainability of near-term demand remains uncertain, energy security, climate change, Asian growth, and the long-term demand characteristics, could provide attractive opportunities to increase exposure to the energy complex, Natural Gas in particular. |
| Private Equity | UNDERWEIGHT | Listed PE is always vulnerable to liquidity risks during periods of increased market dislocations. Furthermore, the risks from rising cost-of-capital and difficulties in refinancing is a risk 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. |
| Developed Market Equity |
|---|
| North America | UNDERWEIGHT | 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. Whilst valuations in small and midcaps looks marginally more attractive, policy uncertainty and weakening sentiment we believe are major headwinds to U.S. small and midcaps. |
| UK | NEUTRAL | Whilst equity valuations, especially in the small and midcap market are attractive, political uncertainty, deteriorating economic outlook and inflation risks remain material. We retain a preference for high quality and stability and note the opportunity in small and midcap companies. |
| Europe ex-UK | NEUTRAL | Whilst FX and Stagflation risks remain material, we belief the changing European fiscal regime represents a major macroeconomic and policy shift in European policy. Valuations remain relatively attractive; however, 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 of our highest conviction opportunities in the region, but valuations are stretched. |
| China | OVERWEIGHT | Overly pessimistic outlook and sentiment towards China are reflected in valuations. Whilst question marks with regards to demographics, real estate, debt, policy and alignment remain, sentiment are showing signs of turning less negative. The risk-reward remain skewed to the upside, and selectively attractive long-term 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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We try to ensure that the information provided is correct, but we do not give any express or implied warranty as to its accuracy. We do not accept any liability for errors or omissions. The content of this brochure is for guidance purposes only and does not constitute financial or professional advice.
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.