During his recent US Senate confirmation hearing, Commerce Secretary nominee Howard Lutnick repeatedly emphasized the Trump administration’s view that other nations have not sufficiently “respected” the United States regarding global trade.
“My way of thinking … is country by country, macro …,” he said. “We can use tariffs to create reciprocity, fairness and respect.” Lutnick, however, left open the possibility for Mexico and Canada to avoid broad tariffs if they can quickly meet demands to stem the flow of illegal immigrants and fentanyl across their borders. We saw this play out this week with delaying 25% tariffs for a month as the latest signal of the fluid trade scenarios.
With “reciprocity” seemingly the key to negotiations in the Trump 2.0 era, global investors have scrambled for insights into foreign policy positioning from abroad and indications of how far foreign leaders may be willing to kowtow to President Donald Trump’s priorities.
Granted, for U.S. investors, home country bias and recency bias are hard to shake, given the mega-cap dominance of US technology stocks. For 2024, the total returns of the Magnificent Seven companies accounted for more than half of the S&P 500’s return (+24%).
But U.S. stocks are also overvalued. The price-to-earnings ratio for the S&P 500 Index as of January 30, 2025 was 25.63—well above its 10-year average. Stock valuations have yet to reach the euphoric levels of the dot-com days, but should inflation threaten to dim optimism, a less concentrated portfolio may help ease volatility.
On the artificial intelligence front, we believe the trend should continue to drive stock market gains over the long term. The recent wakeup call posed by China’s DeepSeek—the new AI model challenging assumptions over US tech supremacy—underscores the need for diversification. It also reinforces our belief that investors should remain mindful of the global opportunity set for differentiated risk and return.
Keep in mind that Beijing’s stimulus measures late last year helped boost China’s stock returns, which ended the year up nearly 19.5%—ranking China among the best-performing emerging markets last year alongside Taiwan, which returned 17.5%. In the future, investors should expect substantial short-term market volatility, particularly given mounting uncertainty around the policies of the new U.S. administration.
Should trade tensions ease, and China’s economy rebalance, we expect a rebound in tourism-related luxury spending. Pre-pandemic, Chinese consumers were among the most dominant segment of luxury goods buyers. Asia held the largest share of personal luxury goods this time last year at 38%. And while consumer confidence waned over the course of the year, resulting in a roughly 19% decline in luxury spending, analysts still forecast a longer-term expansion of the luxury market, mainly driven by the rise of middle-class consumers from China and India.
Global Bright Spots
Given the proliferation of new trading blocs and networks that exclude the United States in this new era of protectionism, we encourage investors to consider the opportunities abroad in maintaining a resilient portfolio. In particular, we have witnessed India taking a more commanding role in global affairs. Two years ago, India flaunted its rising diplomatic clout as a first-time host to the G20 summit, where it helped strike agreements and formally welcomed the African Union to the G20 bloc.
India has signed more than a dozen free trade agreements with regional partners to boost export-oriented domestic manufacturing in the past five years. Prime Minister Narendra Modi has touted a “strong, personal” relationship with Trump and has quickly expressed his commitment to a strategic partnership with the US. In a recent move, Modi vowed collaboration with the US to repatriate some 18,000 undocumented Indian nationals living in the U.S.
When it comes to the historically wide dispersions in the returns of foreign markets, we believe this presents not only opportunity but also diversification benefits. China’s solid 2024 market returns came after its broad market fell nearly 12% in 2023, trailing other emerging economies. We believe China’s stock valuations remain relatively attractive now, at 11.4x, roughly 15% lower than its 10-year average.
Meanwhile, Mexico’s market, which was the top EM performer in 2023 (up nearly 40% given nearshoring tailwinds), saw stock market returns fall about 28% for 2024.
To some extent, investor interest in Brazil also appears to be returning amid the potential for higher oil prices. U.S. tariffs aimed at Canada and Mexico may, however, cause a currency-related inflation surge in Latin America’s largest economy and could obscure the central bank’s outlook for interest rates. Unlike the nations in the direct line of fire of U.S. tariffs, Brazil has a trade deficit with the U.S., its second-largest trading partner, which may offer it some relative benefit. In spite of its fiscal reform and inflationary hurdles, Brazil’s relatively young population and low unemployment rate provide some positive aspects. Latin America’s largest economy remained a diversifier in the EM range, with a LTM P/E of 7.2x, nearly 50% discount of the broad EM countries/regions.
We also view Japan as well-positioned due to its improved corporate governance, which has lifted market sentiment. Japan is among the largest overseas investors in the U.S., constituting 15% of total cumulative foreign direct investment holdings as of the end of 2023, according to data from the Bureau of Economic Analysis. Canada is the second-largest investor, with 14% in FDI U.S. stock, followed by Germany and the United Kingdom.
Unlike South Korea’s more cyclically oriented chips sector, Taiwan’s performance was driven by AI from a range of chip stocks and the supply chain around them. Earnings growth and visibility in earnings should continue to bode well for Taiwanese tech firms.
As the interplay between the world’s macro and fundamental issues continues to be difficult to parse, the case for disaggregating international exposure by allocating to single countries remains strong.
