May 2025 Active Management Insights

Equity managers have adopted a more defensive posture due to increased uncertainty from U.S. tariff policies, leading to reduced U.S. exposure and a rotation towards emerging markets and domestic-focused companies. DeepSeek's open-source AI alternative has tempered expectations for Nvidia and increased focus on software and downstream AI applications, while a constructive stance from the Chinese government and improving consumer sentiment are reviving interest in Chinese technology and EV markets. Despite optimism for gold and copper, U.S. financial regulation has fueled uncertainty, delaying an anticipated M&A boom and negatively impacting small caps and capital markets holdings.

Analysis

Equity managers have broadly adopted a more defensive posture in response to heightened uncertainty stemming from U.S. tariff policies, notably the Trump administration's across-the-board "reciprocal" tariffs, which are expected to disrupt supply chains. This has led to a reduction in U.S. equity exposure, particularly in consumer discretionary companies reliant on global supply chains, and a strategic rotation towards emerging markets, including domestic Asian and Latin American banks, as well as domestically focused companies in developed markets like Europe and Japan. The AI landscape is undergoing a significant recalibration following DeepSeek's announcement of an open-source, lower-cost AI alternative, which has tempered long-term expectations for Nvidia (NVDA) and intensified cost pressures among hardware hyperscalers; consequently, investor focus is shifting towards AI software, downstream applications, and resilient global foundry leaders. Concurrently, sentiment towards China is improving due to a more constructive government stance on technology, the impact of prior stimulus on consumer spending, and renewed interest in its EV market, despite tariff concerns. However, in the U.S., uncertainty fueled by financial regulation and wider credit spreads has dampened the outlook for a previously anticipated M&A boom, negatively affecting small-cap stocks—which have underperformed despite historically cheap valuations—and prompting reduced exposure to private equity firms and investment banks. Global economic trends favor gold miners, benefiting from inflation concerns and a supportive price environment amidst fears of a global slowdown, while copper maintains a positive long-term outlook due to an expected multi-year supply-demand imbalance. Regionally, European markets show an improving cyclical picture, supported by ECB rate cuts and a significant German fiscal package (EUR 500 billion), potentially benefiting undervalued cyclical industries and domestically oriented small caps. In Japan, tariff uncertainty and a potential strengthening yen are driving a shift to domestic demand-oriented stocks, though competition from Chinese manufacturers in tech and auto sectors is a growing concern. Listed real estate, particularly senior housing, is viewed opportunistically, with UK water utilities also favored due to supportive regulatory changes.

Key Decisions for Investors

• Consider reducing exposure to U.S. companies with significant international trade dependencies and increasing allocations to domestically focused firms in developed markets or select emerging markets to mitigate tariff-related risks.
• Re-evaluate positions in AI semiconductor leaders like Nvidia (NVDA) due to increased competition and cost pressures, while exploring opportunities in AI software, downstream applications, and global foundry leaders with strong economies of scale.
• Assess selective opportunities within Chinese technology, consumer, and EV sectors, capitalizing on improving domestic sentiment and government support, but remain vigilant about potential volatility from ongoing trade tensions and regulatory shifts.
• Exercise caution with U.S. small-cap equities and financial sector entities reliant on M&A activity until there is greater clarity on U.S. trade policy, interest rate trajectory, and credit market conditions.
• Maintain or consider adding exposure to gold miners as a hedge against prevailing inflation concerns and potential global economic slowdown, and evaluate long-term allocations to copper producers given the positive structural supply-demand outlook.
• Explore tactical opportunities in European cyclicals, Japanese domestic-demand stocks, and specific under-valued emerging markets, while closely monitoring regional-specific risks such as increased Chinese competition for Japanese manufacturers and political uncertainties in markets like Brazil.