Throughout his latest US Senate affirmation listening to, Commerce Secretary nominee Howard Lutnick repeatedly emphasised the Trump administration’s view that different nations haven’t sufficiently “revered” the USA concerning world commerce.
“My mind-set … is nation by nation, macro …,” he stated. “We will use tariffs to create reciprocity, equity and respect.” Lutnick, nonetheless, left open the chance for Mexico and Canada to keep away from broad tariffs if they will rapidly meet calls for to stem the move of unlawful immigrants and fentanyl throughout their borders. We noticed this play out this week with delaying 25% tariffs for a month as the newest sign of the fluid commerce situations.
With “reciprocity” seemingly the important thing to negotiations within the Trump 2.0 period, world traders have scrambled for insights into international coverage positioning from overseas and indications of how far international leaders could also be keen to kowtow to President Donald Trump’s priorities.
Granted, for U.S. traders, house nation bias and recency bias are onerous to shake, given the mega-cap dominance of US expertise shares. For 2024, the whole returns of the Magnificent Seven firms accounted for greater than half of the S&P 500’s return (+24%).
However U.S. shares are additionally overvalued. The value-to-earnings ratio for the S&P 500 Index as of January 30, 2025 was 25.63—nicely above its 10-year common. Inventory valuations have but to succeed in the euphoric ranges of the dot-com days, however ought to inflation threaten to dim optimism, a much less concentrated portfolio could assist ease volatility.
On the bogus intelligence entrance, we imagine the development ought to proceed to drive inventory market good points over the long run. The latest wakeup name posed by China’s DeepSeek—the brand new AI mannequin difficult assumptions over US tech supremacy—underscores the necessity for diversification. It additionally reinforces our perception that traders ought to stay conscious of the worldwide alternative set for differentiated danger and return.
Remember the fact that Beijing’s stimulus measures late final yr helped increase China’s inventory returns, which ended the yr up practically 19.5%—rating China among the many best-performing rising markets final yr alongside Taiwan, which returned 17.5%. Sooner or later, traders ought to anticipate substantial short-term market volatility, significantly given mounting uncertainty across the insurance policies of the brand new U.S. administration.
Ought to commerce tensions ease, and China’s financial system rebalance, we anticipate a rebound in tourism-related luxurious spending. Pre-pandemic, Chinese language customers have been among the many most dominant section of luxurious items consumers. Asia held the largest share of non-public luxurious items this time final yr at 38%. And whereas client confidence waned over the course of the yr, leading to a roughly 19% decline in luxurious spending, analysts nonetheless forecast a longer-term enlargement of the posh market, primarily pushed by the rise of middle-class customers from China and India.
World Brilliant Spots
Given the proliferation of latest buying and selling blocs and networks that exclude the USA on this new period of protectionism, we encourage traders to contemplate the alternatives overseas in sustaining a resilient portfolio. Specifically, we’ve witnessed India taking a extra commanding position in world affairs. Two years in the past, India flaunted its rising diplomatic clout as a first-time host to the G20 summit, the place it helped strike agreements and formally welcomed the African Union to the G20 bloc.
India has signed greater than a dozen free commerce agreements with regional companions to spice up export-oriented home manufacturing up to now 5 years. Prime Minister Narendra Modi has touted a “sturdy, private” relationship with Trump and has rapidly expressed his dedication to a strategic partnership with the US. In a latest transfer, Modi vowed collaboration with the US to repatriate some 18,000 undocumented Indian nationals residing within the U.S.
In relation to the traditionally extensive dispersions within the returns of international markets, we imagine this presents not solely alternative but in addition diversification advantages. China’s strong 2024 market returns got here after its broad market fell practically 12% in 2023, trailing different rising economies. We imagine China’s inventory valuations stay comparatively engaging now, at 11.4x, roughly 15% decrease than its 10-year common.
In the meantime, Mexico’s market, which was the highest EM performer in 2023 (up practically 40% given nearshoring tailwinds), noticed inventory market returns fall about 28% for 2024.
To some extent, investor curiosity in Brazil additionally seems to be returning amid the potential for increased oil costs. U.S. tariffs geared toward Canada and Mexico could, nonetheless, trigger a currency-related inflation surge in Latin America’s largest financial system and will obscure the central financial institution’s outlook for rates of interest. In contrast to the nations within the direct line of fireside of U.S. tariffs, Brazil has a commerce deficit with the U.S., its second-largest buying and selling associate, which can supply it some relative profit. Despite its fiscal reform and inflationary hurdles, Brazil’s comparatively younger inhabitants and low unemployment fee present some optimistic points. Latin America’s largest financial system remained a diversifier within the EM vary, with a LTM P/E of seven.2x, practically 50% low cost of the broad EM nations/areas.
We additionally view Japan as well-positioned on account of its improved company governance, which has lifted market sentiment. Japan is among the many largest abroad traders within the U.S., constituting 15% of whole cumulative international direct funding holdings as of the top of 2023, based on knowledge from the Bureau of Financial Evaluation. Canada is the second-largest investor, with 14% in FDI U.S. inventory, adopted by Germany and the UK.
In contrast to South Korea’s extra cyclically oriented chips sector, Taiwan’s efficiency was pushed by AI from a variety of chip shares and the provision chain round them. Earnings progress and visibility in earnings ought to proceed to bode nicely for Taiwanese tech corporations.
Because the interaction between the world’s macro and basic points continues to be troublesome to parse, the case for disaggregating worldwide publicity by allocating to single nations stays sturdy.
