Where to find the best value opportunities at start of 2025

All change or more of the same? Global equity markets largely gained ground over the course of 2024, but the US market, buoyed by the stellar returns from technology stocks, has led the way. As a result, the big question for investors in 2025 is whether to look beyond US equities for better value opportunities elsewhere.

The data is striking. European stock markets have largely delivered gains in the single digits or low- to mid-teens during 2024, although France and Germany both fell back. Japan, India and China did a little better, delivering 15%-20%.

Meanwhile, in the US, the S&P 500 ended 2024 with a gain of 23%, while the Nasdaq index rose by 29%. NVIDIA Corp (NASDAQ:NVDA), the star artificial intelligence (AI) stock, saw its shares soar, up more than 180%.

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Returns on bonds were much lower, as investors would expect, but it was again US bonds that often led the way. In particular, the high-yield sector of the market performed well, with best-performing funds up around 10%.

Time to cast the net wider?

Against this backdrop, Ben Yearsley, a director of investment adviser Fairview Investing, believes now may be the moment for investors to cast the net further afield.

“In the bond market, my suggestion is to buy gilts,” Yearsley says. “Current yields, of around 4.45% from two-year gilts and slightly higher for the 10-year equivalent, are not to be sniffed at when inflation is well below 3%; add in the tax advantage and it makes them an interesting proposition – but buy direct rather than though a fund.”

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Direct gilt holdings are exempt from capital gains tax on profits, making them a compelling option for investors holding them outside a SIPP or ISA.

As for equities, Yearsley believes the prospects for UK markets are still strong, but he highlights two other areas as potentially offering better value.

He says: “Asia is still the long-term growth market in my view: demographics is the key trend because as the population moves from subsistence-level to a large middle-class with disposable income, that has a profound effect. China has been a downer on much of the region for a while, but Beijing seems to be finally waking up to the scale of the challenge.”

Yearsley favours broad Asian funds such as Pacific Assets Ord (LSE:PAC), alongside more specialist funds such as Matthews China Discovery.

Unloved smaller companies

The second interesting area on Yearsley’s radar is UK smaller companies.

He explains: “It is fair to say the UK is generally unloved and smaller companies even more so. But with some degree of political stability, even from a left-wing government that seems intent on killing growth, UK small-cap stocks on cheap valuations are well positioned to benefit from the UK consumer having real wage growth.”

Among the options in interactive investor’s Super 60 list of investment ideas is Henderson Smaller Companies Ord (LSE:HSL), which has been managed by experienced investor Neil Hermon since 2002.

The “small is beautiful” idea is also highlighted by Scott Gallacher, a director of financial adviser Rowley Turton, who points out that in this regard, it isn’t necessary to turn your back on the outperforming US.

“I think smaller US equities are going to be one of the best valuation opportunities in 2025,” Gallacher says.

His favourite fund for exposure to that idea is VT De Lisle America. The fund had a tough time in 2024, because its chosen areas of the market – including small manufacturing companies, community banks and industries benefiting from infrastructure spending – could not keep up with large-cap tech stocks. But the fund has a strong medium- to long-term record.

One nuance here is that while index trackers and exchange-traded funds (ETFs) are available in the small-cap space in most markets, many advisers believe active managers are a better option in this more specialist investment discipline.

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If you do prefer a passive approach, James Cooke, deputy chief investment officer at Asset Risk Consultants, counsels caution, particularly if you hold a broad-based fund rather than a small-cap specialist.

He explains: “Initially, in an environment in which smaller capitalisation stocks outperform, we would anticipate an equal-weighted ETF to perform well, but the required regular rebalancing to maintain equal weights would likely erode the benefit given implicit trading costs and an inherent negative momentum bias this rebalancing creates.

“Those looking to benefit from the small-cap effect would likely be better served by allocating to a market capitalisation-weighted small-cap index or by using an active manager.”

Spread risk but don’t abandon US equity market

Elsewhere, Kishan Raja, an investment manager at discretionary investment management firm Hawksmoor Investment Management, believes the key to success in 2025 is going to be to focus on diversification – “by manager, investment style, geography, market cap, and other factors”. He’s not necessarily suggesting investors abandon the US, but broad exposures offer some protection from a valuation perspective.

Raja adds: “Once you combine this with an excellent active manager, such as Sean Peche of Ranmore Global Equity Investor, you will quickly see the excellent contribution both the style and fund can add to compounding of wealth. Peche has been able to produce a return of more than 95% over the last five years compared to the MSCI World Value return of 55%.”

In the UK, meanwhile, Raja highlights another option for diversification. “Artemis UK Select, run by Ed Legget is a best-ideas multi-cap fund that we own across a variety of mandates,” he explains, pointing to its first-quartile performance over the past one, three, five and 10 years. “Allocators tend to screen this as a value fund, but Legget prefers to see his approach as undervalued growth companies; the fund is presently focused towards large-cap stocks, which account for almost 75% of assets, underlining how cheap some of the names are in this space.”

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Alex Watts, a fund analyst at ii, also believes the UK could provide opportunities for investors looking for value.

He says: “Although the UK market has fewer technology stocks, the heavy exposure to finance, energy, and mining sectors should offer diversification opportunities away from the US market, where investors are concerned about high technology concentration and stretched valuations.”

Watts also points out that the UK offers the potential for income as well as growth. “UK dividends fell in the third quarter of 2024 according to Computershare, but this was partly due to a fall in one-off special dividends as well as the currency effect of a strong pound,” he explains.

“The anticipated yield for the FTSE 100 in the coming 12 months is still a little under 4%; the UK rate-cutting cycle is well under way, and while the UK Budget and geopolitical tension have somewhat stalled the decline in bond yields, the draw of UK dividend payers could be restored once more as interest rates continue to fall.”

To take advantage of these opportunities, Watts picks out two funds. First, he suggests Artemis Income, which aims to deliver a steady and growing income along with capital growth over the longer term. It mainly invests in UK companies but has the flexibility to invest overseas when attractive opportunities arise. Watts’ second pick is Fidelity Special Values Ord (LSE:FSV) Trust, which looks across the whole market for out-of-favour UK equities; despite the fund’s strong track record, its shares currently trade at a discount to the fund’s underlying assets of around -8%.

Is cheap China worth a look?

Elsewhere in the world, Watts joins Yearsley in suggesting that now could be the time to take another look at China. “The market has positively digested stimulus measures imposed following a period of declining valuations and poor sentiment stemming from a domestic property crisis,” he explains. “But aggregate price-to-earnings valuations for the Chinese equity market of roughly 12 times’ are still only half the level of the MSCI World index as a whole.”

Here, Watts’ favoured option is investment trust Fidelity China Special Situations (LSE:FCSS). “Managed by Dale Nicholls for the past decade, the trust seeks capital growth from investing in undervalued companies with good long-term potential for growth,” he says. “One area where Nicholls currently sees opportunities is industrials, as China pivots toward high-end manufacturing and production, and aims to become a global leader across electric vehicles, renewable energy and healthcare.”