AJ Bell’s strategic asset allocation (SAA) for 2025 has moved to an emerging market (EM) ex-China stance.
AJ Bell said China remains attractive but “flexibility is key and moving to an EM ex-China structure should provide opportunity to control China allocations”.
SAA is a portfolio strategy, where the investor sets target allocations for various asset classes and rebalances the portfolio periodically.
AJ Bell head of investments solutions, James Flintoft, said: “As we kicked off 2025, many investors will have been reassessing their portfolios and how their asset allocation stacks up against the current global market and economic climate.”
Flintoft outlined that the EM ex-China is just one of three changes AJ Bell has made to its SAA.
He also explained that AJ Bell has been examining the benefits of moving to using EMs ex-China “for a while”, with AJ Bell now observing “sufficient products available that are efficient and come at a low-cost to enable allocations to EM ex-China and China independently”.
However, Flintoft added: “We are only trimming the China allocation a little” and this does not translate to AJ Bell “becoming negative on the prospects for China”.
Still, he cautioned those “stuck with Chinese equities intertwined within Asia and EM ETFs, and funds could end up hamstrung when it matters most”.
Th other two changes relate to bonds and inflation, and equity concentration risks.
Flintoft explained: “There is an argument that investors have been napping with regards to inflation and government deficits, and are now being forced to wake up to the risks these present to bond markets.”
He argued that central banks have been attempting to take the credit for inflation lowering, but “the UK and US have been beneficiaries of deflation from China, which is largely unacknowledged”.
AJ Bell is not “predicting a sudden upwards spiral for inflation and yields, but investors do need to consider how big a tail risk these are”.
In regard to bonds, the team found frustration in the performance of bonds, particularly when it came to the low risk end and the performance of US treasuries as markets went through a series of re-pricings on interest rates.
Regarding equity concentration, Flintoft said: “Diversification has gone out of the window in some major markets and concentration is building in key areas.”
He warned of too much concentration around the US ‘Magnificent Seven’ as well.
“The Magnificent Seven are not only driving performance in the US, but also contributing significantly to world equity indices.
“We feel it is prudent to start thinking about managing that concentration risk in the US specifically, rather than relying on broad geographic diversification to do all the heavy lifting.”
The Magnificent Seven consists of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
At the same time, AJ Bell has removed allocation to alternatives in its 2025 SAA for Managed Portfolio Service products, concluding they did not provide adequate diversification to portfolios.
AJ Bell Investments’ assets under management have grown from £2.8bn to £6.8bn over the past two years.
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