Navigating Uncertainty: Prudent Investing Amid Shifting Valuations and Market Volatility in 2025

Shanti Das-Wermes: Currently, the range of outcomes in terms of the global economy are extremely wide. Now, at the same time, we are experiencing some major structural shifts. On the one hand, we're seeing geopolitical conflicts expand. We are actually seeing some hot wars around the globe. Secondly, we're seeing a realignment of global supply chains and the global economy. This is a direct result of tariffs, as well as the trading blocks that are surfacing and thirdly, is a higher inflation or a higher cost of capital. Effectively, this is the result of very aggressive monetary stimulus as well as the high deficits and level of debt that governments are running. At the same time, there's also very exciting developments in the world of technology and AI. These technologies really could be transformational to how we work and interact together going forward. What is true is that when we put all of this together, there is a higher level of uncertainty, which effectively also means a higher level of volatility, and we will seek to protect the capital, but also take advantage of the opportunities that we find through this periods of volatility.
In terms of valuations, where we found ourselves at the beginning of the year, we found ourselves whether measured through a price-to-earnings ratio or an EV-to-sales ratio, which tries to normalize for potential margin over earning in the highest decile. What that means is valuations have never been more expensive than where they are at the moment. We can view it through a different lens, which tries to adjust for the business cycle by taking a metric such as the S&P 500's CAPE or Cyclically Adjusted Price-to-Earnings Ratio. And again, this ratio was at 37 times at the beginning of the year, it retraced, but then rebounded to close to 36 times at the moment, well above its historical averages. Practically, what does that mean? That means that we as investors need to be cautious because when looking at forward returns in periods when we found ourselves at these extreme valuations, they imply either low or potentially even negative returns for equities going forward.
A prudent investors seeks to preserve and grow capital in real terms through a business cycle or a market cycle. What that effectively means is that we try to be risk aware rather than risk averse, and one of the main metrics to which we measure risk is really by protecting the downside. We do this by employing three different levers across the fund. The first is asset allocation, where we're able to actually toggle our net equity exposure between 50 and 90%. The second lever is through security selection. We are able to choose securities from an unconstrained universe and try to go where the opportunities are. We pay very little attention to the index. And thirdly is through a form of insurance, which takes the shape of a portfolio of options which try to protect us against systemic risk. Now practically, what does this actually mean? What this means is that we've been operating closer to the lower bound of our net equity exposure, so closer to 50% over the last two years, particularly as equity valuations were elevated, not just across global indices, but particularly across North American or US indices.
At the same time, we found ourselves in a position where the fixed income universe was providing us with attractive opportunities, be that on the risk-free side of the equation, securitized as well as the corporate credit side. At the same time, we also maintained a position in gold, in gold miners, which further aided our diversification efforts. We've seen our net equity exposure actually increase throughout 2025 as a result of stock performance, but as well of taking the opportunity to increase our net equity exposure post the Liberation day sell-off. Since then, equity indices have rebounded quite aggressively and we found ourselves taking a more cautious stance since.
Performance should ideally be measured over a market cycle and particularly over the long term. That said, it is true that we've had a very eventful first half and we're satisfied with the performance the fund has exhibited. In 2024 and heading into 2025, we found ourselves at the lower bound of our net equity exposure, which was close to 50%. This was a direct result of the opportunities that we could find within the fixed income universe, be that the risk-free side or also the corporate credit or securitized side, as well as of elevated valuations particularly across US indices. So 2024 was a year where we reduced and in many cases exited many of our US holdings.
At the same time, we found ourselves finding attractive opportunities within the European indices or European stocks where we found a certain quality premium had actually dissipated. This served as well heading into 2025 where many of these European stocks actually outperformed the broader indices. This resulted in us having a slightly higher net equity exposure heading into Liberation Day. That said, we still managed to protect the downside with a downside capture rate of less than 25%. We subsequently took the opportunity to actually increase our net equity exposure in that dislocation that was experienced by global markets, and we found opportunities within the sectors of technology, semi-cap, energy, as well as financials.
The types of companies that we try to look for, or that we look for on a global context are structural winners or category champions, which operate in growing industries. Typically, these are the types of companies that also exhibit superior returns, superior margins, and consistent with our focus on downside protection, they also have much better balance sheets. Our net equity exposure actually peaked at around 62% during the month of May, and given the rapid rebound of the markets, we've turned more cautious since. So we remain focused on trying to find attractive opportunities in a global context across asset classes, which can protect and grow capital in real terms.

The views expressed are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.
Please note that this is an actively managed product.
See the fund’s offering documents for more details, including information on fund risks and expenses.
For additional information, call Latin America: 416.506.8418 in Toronto or 352.46.40.10.600 in Luxembourg. European Union: MFS Investment Management Company (Lux) S.a r.l. 4 Rue Albert Borschette, Luxembourg L-1246. Tel: 352 2826 12800. U.K.: MFS International (U.K.) Ltd., One Carter Lane, London, EC4V 5ER UK. Tel: 44 (0)20 7429 7200.
MFS Meridian® Funds is an investment company with a variable capital established under Luxembourg law. MFS Investment Management Company (Lux) S.à.r.l is the management company of the Funds, having its registered office at 4 Rue Albert Borschette Luxembourg L1246, Luxembourg, Grand Duchy of Luxembourg (Company No. B.76.467). The Management Company and the Funds have been duly authorized by the CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg.
The funds are established as a “restricted foreign scheme” in Singapore; therefore, material in connection with the offer or sale of the funds may be distributed only to persons in Singapore who are qualified under Sections 304 and 305(2) under Chapter 289 of the Securities and Futures Act.
MFS Meridian Funds may be registered for sale in other jurisdictions or otherwise offered where registration is not required.
MFS Meridian Funds are not available for sale in the United States or to US persons.
Information on investors rights is made available in English and, as the case may be, in local language at meridian.mfs.com. MFS Investment Management Company (Lux) S.à r.l. may decide to terminate the marketing arrangements of this fund in accordance with the appropriate regulation. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries. The offering documents (sales prospectus and Key Information Documents (KIDs)) or in the U.K. Key Investor Information Documents (KIIDs)), articles of incorporation and financial reports are available to investors at no cost in paper form or electronically at meridian.mfs.com, at the offices of the paying agent or representative in each jurisdiction or from your financial intermediary. Information on investors rights is made available in English and, as the case may be, in local language at meridian.mfs.com. MFS Investment Management Company (Lux) S.à r.l. may decide to terminate the marketing arrangements of this fund in accordance with the appropriate regulation.

 

This material is for use only in Austria, Central America, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, North America, Norway, Singapore, South America, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom.
FOR INVESTMENT PROFESSIONAL USE ONLY. Not intended for retail investors.

65403