The rising case for international equities

The investment landscape for financial advisors, wealth managers, and portfolio managers is undergoing significant shifts, particularly in Europe, where massive fiscal reforms led by Germany are expected to spur earnings growth and equity valuations. These reforms include increased defense and infrastructure spending, coupled with potential regulatory easing, which could drive economic expansion and enhance the attractiveness of European equities. Additionally, the settlement of the Russia-Ukraine conflict, reduced impact of US tariffs, and China's support for its technology sectors are seen as potential catalysts to bridge the equity performance gap between the US and other regions.

International developed market equities have outperformed US equities, with the MSCI EAFE Index showing strong gains, indicating a potential shift in regional leadership. This resurgence is partly attributed to oversold conditions and strengthened currencies against the US dollar. European companies are less exposed to US tariffs due to strategic shifts in manufacturing locations, which could mitigate risks associated with trade tensions. Furthermore, the potential end to the Russia-Ukraine conflict could unleash significant reconstruction demand, boosting sectors like construction and materials, while also potentially reducing energy costs across Europe.

Germany and Japan are poised to increase fiscal stimulus, with Germany's political shifts enabling substantial infrastructure and defense spending. This move aims to enhance competitiveness and stimulate economic growth, with expectations of increased fiscal spending in the coming years. Japan's recent reforms and fiscal measures are also aimed at improving corporate profitability and attracting investment.

China is re-emerging as a viable investment destination, as the government appears to be reversing restrictive measures to support technology companies, potentially revitalizing its economy and equity markets. This shift, combined with broader policy catalysts, suggests a potential reversion in global equity leadership, with non-US markets offering compelling opportunities.

Overall, the current environment presents a favorable backdrop for active international equity managers, with lower inflation levels in Europe providing the ECB with more flexibility to adjust interest rates. Non-US companies are gaining prominence in various sectors, and despite potential concerns about innovation, the combination of earnings growth and valuation rerating could offer attractive returns for investors willing to explore opportunities beyond the US.