It’s been another tough year for international markets, which have lagged far behind U.S. stocks. The outlook for the new year doesn’t look too promising either. The iShares MSCI ACWI ex US ETF (ACWX) is up just 4.6% year to date. By comparison, the S&P 500 rose 26% during the same period. Europe’s Stoxx 600 also lags behind the U.S. benchmark, up just 7% this year. The Shanghai Composite Index is up about 13% for the year, while the Nikkei 225 Index is up more than 17%. Investors are not optimistic that 2025 will be a better year for international markets due to concerns about slow economic growth, rising inflation risks and a stronger dollar due to U.S. tariffs, coupled with geopolitical uncertainty. “Many global multi-asset investors are approaching 2025 with trepidation, and this growing unease is understandable,” said Todd Jablonski, chief investment officer at Principal Asset Management. The list of significant concerns is long. “We expect market volatility to increase in 2025 and the tide of risk to rise as well. ” ACWX .SPX YTD Mountain ACWX vs SPX Many economists and analysts expect that President-elect Donald Trump’s proposed tariffs and tax cuts on countries such as Mexico, China and Canada will ultimately lead to a stronger dollar. A stronger dollar may “The strengthening of the U.S. dollar, driven by protectionist trade policies, will hurt the purchasing power of other countries, thereby hurting international markets,” said Richard Ratner, senior vice president at Bel Air Investment Advisors. Commodities have become more expensive and reduced returns for U.S. investors holding non-U.S. stocks, Mark Giambrone, head of U.S. equities at Barrow Hanley, noted that investor returns in other parts of the world have been relatively disappointing, largely due to foreign exchange headwinds. “For a long time, currencies have been negative for these markets, whether it’s safety factors or rising U.S. interest rates,” Giambrone noted. “We should eventually get to a point where the dollar weakens, which is very good for non-U.S. markets. I don’t see that happening anymore.” Weak global economic growth Europe and China are expected to underperform the broader market in 2025. The euro was trading around $1.0488 against the dollar on Tuesday. It has fallen about 5% against the dollar so far this year. “European economic growth stagnation prompted interest rate cuts, which supported the accumulation of U.S. stocks,” said Ratner of Bel Air Investment Consultants. The uncertain political backdrop also weakened investor sentiment in some international markets. The collapse of the French and German governments this month underscored Europe’s lack of critical leadership amid economic woes. Declines in German manufacturing orders and industrial production data also suggest the economy may no longer be able to avoid recession next year. Beyond that, most investors remain on the sidelines on China’s markets – even after a brief spike in optimism this year after the Politburo launched various stimulus measures. Although policymakers have signaled they will step up fiscal policy in 2025, continuing signs of a sluggish real estate market and weak consumer confidence point to a muddled outlook for China’s stock market. “The bleak landscape remains rooted in a vicious cycle of deflationary risks,” said Seema Shah, chief global strategist at Principal Asset Management. “High hopes for a bazooka of policy stimulus have faded, but fiscal expansion should at least lay the groundwork for a weakening economy.” .” Andrew Krei, co-chief investment officer of Crescent Grove Advisors, said Trump’s tariff threats “created rhetorical suspense for international markets.” He added that the U.S.’s imposition of additional tariffs on overseas goods will have a stagflationary impact on international stock markets. Joyce Chang, the bank’s global head of research, warned at a Japan Association event in late November that the levies would “severely impact China’s economic growth.” Chang said that during Trump’s first term, tariffs reduced global economic growth by about 0.4% and caused a slight increase in inflation. Emerging markets will feel the greater impact of tariffs. Economists at BNP Paribas said the drag on net trade and rerouting from tariffs would be severe for economies with an already weak starting point for growth. They highlighted the economies of Southeast Asia and Central and Eastern Europe as those most vulnerable to tariff reductions. Furthermore, “companies in countries with weaker cyclical conditions, such as the Eurozone, CE3 and emerging market Asia, may struggle to pass on higher input costs to consumers along the rest of the price chain, thereby hitting BNP Paribas In his 2025 Global Outlook, Ryan Dykmans, chief investment officer of Dunham & Associates Investment Advisors, takes the opposite view. He believes that Europe may be a beneficiary of the Sino-US trade war. “This can actually improve the competitiveness of the EU.” Kermans said. While opportunities abound, the outlook for international markets appears bleak, but not all hope is lost. Barrow Hanley’s Giambrone said if the conflicts between Israel and Hamas and Russia and Ukraine were near or complete resolution in 2025, global markets could see a “peace premium” that would benefit European and Asian stocks. The investor cited conversations with political advisers who believe the Trump administration may pressure leaders involved in conflicts in Europe and the Middle East to reach faster resolutions. Through “the peace premium, commodity prices will fall because defense spending will also fall, creating a positive offsetting effect,” Giambrone said. From a country-specific perspective, one market that global strategists are bullish on is Japan. Recent corporate governance reforms are a major factor in increasing overseas investor confidence in the ability of Japanese companies to provide returns to investors. In early 2024, the Nikkei 225 climbed to a 34-year high before selling off sharply in early August. .N225 2024 YTD Nikkei Index 225 JP Morgan strategist Rie Nishihara said: “As the economy enters its third year of normalization, we expect the Japanese stock market to enter a sustained growth phase, and corporate governance reforms will lead to corporate Behavior happens at different paces. Nishihara added that some of the macro consequences of Trump’s policies – such as the relative weakness of the yen – will be a tailwind for Japanese markets, another overseas market to watch, said Ridham Desai, a strategist at Morgan Stanley. It’s India. “India remains the market to beat,” Desai wrote earlier this month. He expects India to become one of the largest emerging markets next year. Desai added: “With strong earnings, macro stability and domestic capital flows, the investment case for India is undisputed.” To be sure, not all of Wall Street is so bullish. Bank of America says Indian stocks will be stuck “between hope and caution” next year. Analyst Amish Shah noted that Indian stocks may underperform U.S. markets in U.S. dollar terms as the U.S. dollar strengthens. Unsettled US policy has also created uncertainty for Indian stocks, he added. Bank of America economists said: “Nonetheless, policy easing coupled with better trade terms can solidify medium-term growth prospects, putting India firmly on track to become a $5 trillion economy in the next three years and a $100,000 economy in the next decade or so. billion dollar economy.
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