The US has, particularly since the Great Financial Crisis of 2007-8, been the equity market of choice for many investors. This phenomenon has more recently been accentuated by the seemingly unstoppable ascent of the Magnificent 7 (Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta and Tesla). This has led to increasing levels of concentration within US equities. At the end of 2024, a third of the S&P 500 was made up by just these seven companies (they have since lagged that index).
For those choosing to invest passively, there seemed to be little downside — if anything, staying concentrated in US equities through a passive vehicle appeared to be the right way to invest as long as both the ascent of the Magnificent 7 and faith in US exceptionalism persisted.
However, much of this has been upended. Firstly, after most investors expected a relatively benign Trump 2.0 — his second term in office — to be the same as Trump 1.0, US markets have underperformed their global counterparts. Secondly, at the same time, investors started to fret about the potential for returns on the high amounts of research and development being expended by US large cap tech firms. This was brought into sharp relief by Chinese AI startup DeepSeek, which created almost the same results at a fraction of the US levels of expenditure. Finally, the view of the US as a safe haven asset class has been upended by increasingly volatile pronouncements from the White House. Foreign investors with excess savings had willingly funded the growing US deficit as they sought exposure to its rising currency and stronger asset returns. Today, however, this relationship is breaking down. This can be seen specifically in the relationship between the US dollar and US yields. This is important because normally higher US yields mean the US economy is performing well; however, US yields recently have been increasing because US debt is viewed as riskier (due to fiscal concerns and policy uncertainty), and the dollar is simultaneously weakening. This is the kind of relationship one sees more regularly in less developed markets.
The case for US exceptionalism, which had justified ever-higher allocations to US equities, is suddenly looking a lot less secure.
US returns may have justified higher valuations earlier, but this relationship has become more tenuous, as the chart below shows.
Superior fundamentals may no longer justify higher valuations of US equities
Non-US markets remain cheap relative to the US (although less cheap relative to their own long-term historical ranges) as the chart below illustrates.
Non-US markets are cheap relative to the US
If we assume that we are experiencing (1) a reversion to a more normalised interest rate environment, namely higher interest rates, (2) less globally synchronized macro and policymaking cycles and (3) resultant lower correlations across and within asset classes, the importance of diversification becomes abundantly apparent.
The basic beta play of investing passively in a specific geography or theme is less compelling, given the greater uncertainty.
So where and how to invest?
The value of diversification has come back with a vengeance, notably markets outside of the US. Investors are also questioning how ‘global’ global funds really are given US exposure of more than 70% in those funds. Instead, international exposures have been in greater demand — this includes Europe, Asia and some emerging markets. In short, global ex-US — namely international markets — is where interest is picking up.
The case for investing in Europe has multiple legs but in short, structural factors such as
- the Savings and Investment Union aimed at mobilizing Europe's c.€33 trillion in savings assets
- Germany's unlimited defence spending and €500 billion infrastructure fund
- The structural rise in defence spending across Europe where there are likely to be linked increases in tech investment,
- Greater capital markets impact linked to both potential M&A as well as facilitation of policy execution
Investor flows to these regions have already picked up.
Today, we are also witnessing the return of higher stock level dispersion compared to historical norms. Today’s market is highly idiosyncratic with Sharpe ratios across fundamental factors high and increasing. In other words, idiosyncratic opportunity abounds.
A lesser-known example of this dispersion has been European banks, as shown below.
European banks have outperformed US Mega Cap tech
Total return. Indexed to 100 in Jan 2022
Source: Goldman Sachs, as at 2 June 2025.
Past performance is no indication of current or future performance.
Significant opportunity also exists in Asia. In a multipolar world, stakeholders are looking to bolster local supply chain robustness and diversification. And regardless of the view on China, a more benign tariff outcome would be positive for the region. Given the practical implications of attempting to return manufacturing to the US (for example, higher iPhone prices for US consumers) we are already seeing pragmatic reversals in initially high and aggressive tariff statements. Advancements in AI-related developments will have a positive impact on countries such as Korea and Taiwan particularly given their significant exposure to hard tech industries. This positions them well for the ‘second derivative’ benefits of the AI revolution. The region also is home to an incredibly wide range of investible companies ranging from highly cashflow generative large cap staples to high growth smaller cap tech related names.
As for Japan, the investment case has undergone a generational shift given the return of a more normalised inflation backdrop, which allows for structurally stronger nominal GDP growth. Japan should also benefit from a shift to a more multipolar world and friend-shoring, particularly as Japan is viewed in a more favourable light versus other large peers in the region. Japan is also enjoying its own secular equities bull market linked to higher corporate returns on equity, stronger earnings growth, and valuation re-ratings. Finally, successful liberalisation of the Nippon Individual Savings Account (NISA) should lead to higher household engagement with and demand for domestic equities in Japan
Finally, India continues to fulfil its potential — its demographic dividend, combined with the long-standing effectiveness of its structural reforms, and today its nimbleness in navigating global uncertainty, are very much in its favour.
The world is changing. Is this a watershed moment in how investors allocate capital? With diversification at the forefront of investors’ minds, non-US equities have a clear opportunity to benefit. International markets offer not only diversification, but also increasingly compelling return potential. If we are entering a new era in global investing, non-US equities are well positioned to reclaim a more strategic role in portfolio allocation.
The value of active minds: independent thinking
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