The shift toward non-U.S. equities has been driven by heightened uncertainty on U.S. trade negotiations, a weaker USD and the unwinding of U.S. exceptionalism.

European equities were the top performer among developed markets year-to-date due to several factors. Firstly, European equity valuations (14.5x, in line with the 15-year average) are relatively attractive compared to U.S. counterparts (S&P: 20.9x vs. long-term average of 17x). Secondly, falling inflation, aided by lower energy prices and a stronger euro, enables the ECB to proactively cut rates to spur growth. Thirdly, European economies plan to increase defense spending from an average of 2% of gross domestic product (GDP) to 3.5% later this decade, primarily targeting European providers, which will boost the region’s heavy industries. Additionally, Germany’s 500 billion euros Infrastructure Fund commitment, divided among digital, electricity, energy transition and traditional infrastructure, is expected to benefit sectors like construction materials, industrials, manufacturing and transportation. Fourthly, policy clarity, consistency and credibility within Europe are highly valued by investors amid U.S. volatility and uncertainty. Lastly, domestic investors are reallocating back to Europe after years of favoring the U.S.

In China, after a strong first quarter in 2025, recent macro data has been mixed, suggesting potential moderation later this year due to lingering domestic demand weakness from the real estate sector, structural imbalances and deflation pressures. However, the recent U.S.-China tariff de-escalation suggests global trade tensions may have peaked. Chinese equities remain crucial for asset allocation, emphasizing the importance of diversifying equity allocation globally amid heightened market volatility. Potential policy stimulus to counter trade tariffs and ongoing AI development could support the technology sector in the near term and benefit the broader economy in the long run.

Japanese equities have traded in a narrow range since the V-shaped recovery. Positive earnings results reflect strong corporate reforms and shareholder returns progress, showcasing transformation by Japanese corporates. However, earnings may face downside risk given their correlation with global and local capital expenditures. A strong JPY may also weaken the outlook. Valuations may offer some cushioning, but the strategic outlook is more favorable. With underlying inflation gradually moving toward 2%, the BoJ is likely to hike rates modestly while maintaining accommodative financial conditions. JPY strength could impact exporters but benefits the local economy and domestically oriented businesses. The weakening correlation between currency and equity movement highlights domestic resilience, suggesting a stronger JPY can coexist with rising equity performance, especially if domestic economic activity and consumption recover. 

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