Although US allocations are cornerstone positions for most investors, it remains important – and also simpler than before – to widen exposures and keep diversified. There's also a desire to go for where value can be found. We examine the views of two large fund management houses.

Investors may have enjoyed big US market gains in 2024 but they should cast their eyes to other regions in 2025, according to Franklin Templeton and abrdn.

There's a sense – as seen here – that the US remains the world's economic dynamo, particularly with a new president in the White House who is enthusiastic about deregulation, cheap energy and resistant to tax hikes – apart from tariffs on foreign goods. But for some asset managers, there is a need to consider diversification abroad.

This week, Dina Ting (pictured) and Marcus Weyerer at Franklin Templeton highlighted how valuations for US stocks are now at record highs, prompting a look into global market prospects.

In their opinion, US allocations will remain the cornerstone of most equity investors, and the country’s economic growth will likely outperform both peers and expectations alike. “But given the broadening of the rally, and seismic shifts in a geopolitical context, diversification has never been more important. It also has never been simpler to achieve thanks to an ever-expanding range of low-cost, no-hassle and precise instruments like single-country or regional ETFs, rules-based dividend strategies or thematic portfolios," they said.

Other wealth managers, such as Standard Chartered, Northern Trust Asset Management, UBS Global Wealth Management, Pictet Asset Management, UBS Global Wealth Management and Goldman Sachs Asset Management also favour US equities in 2025. Mark Haefele, chief investment officer at UBS Global Wealth Management, advocates adding portfolio hedges such as gold, and favours diversification into alternative and other less correlated assets. See more commentary here, here and here.

Although momentum can continue in US stocks due to double-digit earnings' growth expectations and the artificial intelligence (AI) theme, Ting and Weyerer think that investors with a long-term view should be mindful of global diversification benefits and opportunities for differentiated risk-and-return outlooks abroad.

The good news is that global growth is projected to strengthen somewhat in 2025 to 3.3 per cent and remain stable through 2026. “Given the rise in protectionism, however, certain foreign markets appear more exposed to trade risks than others, and the US dollar strength may not present equal pressure on all their exports,” they said.

Mexico and Canada
The Franklin Templeton duo emphasised how Donald Trump has taken tariff aim not only at China but also at America’s two other largest trading partners, Mexico and Canada. He has threatened to levy import taxes of 25 per cent on Mexico and Canada, accusing them of allowing undocumented migrants and drugs to come into the US. Ottawa is preparing counter tariffs in response to the threat.

Despite the protectionist stance, Ting and Weyerer think that the Canadian equity market should find support in strong earnings and growth expectations in 2025. Although Canada could need to make further trade concessions beyond those outlined in the current US-Mexico-Canada trade pact (USMCA), it should eventually be able to negotiate a solid agreement for all. Compared with the US market, Canadian stocks also appear to them to be a bargain.

The picture south of the border has been quite different since the end of the second quarter, with the MSCI Mexico Index down roughly 16 per cent in US dollar terms, amid prevailing concerns over President Claudia Sheinbaum’s ability to improve domestic business environment.

That said, Sheinbaum has expressed hope that her administration could “continue building joint solutions” with the US. Many US companies benefit from the trade pact, and Sheinbaum could also lean on them to lobby against major tariff increases. The current USMCA, which was negotiated under Trump, was less detrimental for Mexico than its officials had initially feared. Fresh negotiations may introduce market volatility, but over the longer term, Ting and Weyerer see economic advantages to investing in Mexico, including its youthful population.

In 2024, Mexico's peso shed more than 15 per cent of its value, contributing to its market underperformance. Given the path of lower interest rates, however, they believe that further currency headwinds have already been largely priced. In their analysis, Mexico’s stock valuations are increasingly attractive. The estimated 2024 price-to-earnings ratio, at 11.8, is on a par with that of Brazil’s and China’s, while return on equity is in line with that of Brazil at about 14 per cent compared with 11 per cent for China.

Brazil
Latin America’s largest economy is a cyclically oriented market with currently cheap valuations that Ting and Weyerer believe long-term investors may find appealing. Like Mexico, resource-rich Brazil has a relatively youthful workforce and a low unemployment rate. Among the country’s biggest priorities is a reduction of its deficit to regain greater investor trust, while it holds financial inclusion to be a policy priority.

“Although it is the world’s largest exporter of soybeans, Brazil is a relatively closed trade economy, with trade accounting for about 33.9 per cent of gross domestic product (GDP) in 2023. Analysts believe this could leave Brazil relatively less impacted by tariffs compared to Mexico. In November, Brazil became the latest emerging market to host the world’s preeminent platform for global economic cooperation, the Group of 20 Summit, in Rio,” they said.

China
The duo highlighted how Trump has pledged a 10 per cent tariff as soon as 1 February, on top of existing China tariffs, which appears less severe than the 60 per cent he touted on the campaign trail.

Considering that one of the largest US trade deficit is with China, it may not be easy for Beijing to blunt Trump’s ability to levy tariffs on its exports. What China has previously done is to raise tariffs on American goods that are easy to replace from elsewhere, for example commodity products such as grain and seafood, but not on items such as US-manufactured pharmaceuticals and aircraft. Consequently, Chinese consumers have not paid more for certain imports, despite increased duties on some American products, according to studies by the Peterson Institute for International Economics.

“In 2023, China’s gross domestic output expanded 5.2 per cent after abandoning its zero-Covid policy. While the International Monetary Fund (IMF) has called on China to do more to address its real estate sector woes, it revised up its China growth projections at 5 per cent in 2024 and 4.5 per cent in 2025,” they said.

Ting and Weyerer think China’s recent monetary policy stimulus and efforts at real estate stabilisation could help to offset external geopolitical turmoil and support a cyclical recovery. They are encouraged by its increasing focus on domestic consumption that may shape long-term investment opportunities in one of the world’s most populous countries. “Additionally, China’s financial sector has been the top performer following ongoing financial reforms that have opened the market to foreign investment and the rapid development of fintech innovations,” Ting and Weyerer said.

Another perspective
UK-headquartered abrdn also suggests caution in reading too much into what Trump might do in terms of trade policy. 

Nicholas Yeo, head of Chinese equities at the firm, showed that history suggests that the ‘Trump is bad for China’ narrative isn’t necessarily enough to drive equity returns in the long run. Yeo sees domestic issues as the most important driver of Chinese stock prices.

Following the initial impact of the first trade war in 2018, Yeo noted how Chinese markets rallied from the end of 2018 to mid-2021. “Then, in 2021, it was actually domestic issues that impacted the market, including radical Covid policies, a regulatory crackdown, and property deleveraging. The direct impact of tariffs was relatively short-lived,” Yeo continued. What’s more, following the first Trump presidency, Chinese companies have developed various alternative trade routes and fostered new destinations for their goods. These actions would further soften a tariff impact.

From a valuation perspective, there is still a disconnect between low valuations and yet strong earnings delivery for quality companies in China. With the margin of error in China still attractive, valuations palatable, and the country’s unloved status with investors, Yeo believes there is scope for a long and sustained re-rating of these companies, especially given how negative sentiment has become Yeo said. 

Policy execution remains at the top of investors’ minds, so Yeo wants to see meaningful measures that have a tangible impact on the economy. In the longer term, Yeo expects innovation to underpin growth in crucial sectors represented by our five portfolio themes: aspiration, digitalisation, green, health, and wealth. “The types of jobs in these sectors will become more sophisticated over the coming years, likely supporting the long-term growth of the Chinese middle class. As we have seen in 2024, there will be challenging periods for China on the road to achieving high-income status,” Yeo said.

Over his thirty years of investing in China, Yeo has found that the best way to navigate market ups and downs is to buy and hold companies that have strong long-term growth stories. “These are the companies that can emerge from downturns in stronger positions. The evidence from our companies suggests they have weathered the storm so far, and have also continued to grow,” Yeo said.

Taiwan
Back to Franklin Templeton, Ting and Weyerer said they have seen a surge in demand for Taiwan, India and Japan single-country exchange-traded funds (ETFs) as some investors diversify from China and appreciate the flexibility that ETFs allow in addressing portfolio overweights and underweights. “Year-to-date, as of the end of November, Taiwan’s stock market has returned nearly 15 per cent in US dollar terms versus 7.7 per cent for the MSCI Emerging Markets Index,” they said. 

Analysts expect an ongoing resurgence in global semiconductor sales to continue boosting Taiwan’s market. Powered by artificial intelligence and 3D technology, the chips industry is forecast to see growing demand in key markets. “Taiwan’s most valuable chip giant plans to further expand its global footprint. In collaboration with Sony and Toyota, Taiwan Semiconductor Manufacturing Company has new plans to build a second plant in Japan. The firm has a stranglehold on the chips supply chain, especially for those powering high-performance AI applications,” they said.

Japan
The duo highlighted how Japan’s economy has shown moderate expansion in the July to September 2024 period, putting its annualised growth rate at 0.9 per cent due to healthy consumer spending.

Exports from Japan rose by 3.1 per cent year-over-year in October 2024, topping market forecasts of 2.2 per cent with a rise in shipments of manufactured goods to Association of Southeast Asian Nations member states. “The weakening yen is a plus for exports, tending to make Japanese products cheaper overseas,” they said.

Boosting consumer spending are recent income tax reductions, a strengthening labour market – with annual wage gains above 5 per cent – and record-low unemployment. Additionally, currency dynamics are still favourable, supporting exporters.

Japanese corporates have been implementing investor-friendly reforms and returning more capital to shareholders. Share repurchases are running at roughly four times the average of the past decade. Activist investors have been pouring into the market, pushing for more shareholder-friendly boardrooms. Government officials have also adopted more programmes to stimulate domestic savings in equity-linked investments, which they see driving new flows into Japanese stock markets. As global capital market activity accelerates, they believe further deal-making could help unlock shareholder value.

India
Investors in India’s booming equities markets have shown growing optimism over opportunities that could arise in 2025. Even considering the effect of potentially broad reaching tariffs on Asia, Ting and Weyerer see the potential for the subcontinent to be an outlier.  

“Markets known for their low-cost manufacturing, such as India, may benefit from further foreign direct investment as the global shift to “China+1 accelerates. These markets may see greater opportunities to meet worldwide demand and seize a larger share of global manufacturing. This increase in production could help offset the negative effects of higher tariffs on their US exports,” they said.

India has been one of the world’s best-performing markets over the past 20 years. Ting and Weyerer see it as a long-term allocation and one to which many investors are under allocated.

“Market watchers believe that Trump is likely to continue multi-year efforts to cultivate India as a strategic partner against a more assertive Beijing, and this bodes well for trade relations. Case in point are the massive new investments in India by major US tech firms like Apple,” they said.

According to Bloomberg Economics, the US is now India’s key trade partner with two-way trade of nearly $120 billion over the past fiscal year – up more than one-third in five years.

India has an unrivalled young and educated workforce and the country is committed to an impressive infrastructure buildout. While the path of emerging market returns may be bumpy, Ting and Weyerer think there are opportunities stemming from the ongoing AI boom. President Donald Trump and Prime Minister Narendra Modi enjoy good relations. Also, they’ve been encouraged by the policy reforms that set a strong foundation for the rise of India’s consumer class.

South Korea
Ting and Weyerer emphasised how South Korea, one of the world’s most trade-reliant nations, can boast diverse businesses embedded across supply chains for a variety of industries, such as petrochemicals, electric vehicles, appliances and semiconductors. “With China as its largest trading partner, a Trump presidency and the potential for potential trade risks looms large,” they said.

While investors seemed to be adjusting their portfolios to reduce exposure to markets that may be impacted by the potential for Trump’s protectionist policies, South Korean equities may be reaching a level of being notably undervalued, in their opinion. The country’s chip-making fortunes have soured as Samsung’s share in manufacturing cutting-edge chips remains small compared with its rivals. The company is investing heavily in technology to ramp up its HBM3E production capabilities. These components are critical for AI applications and have driven competitors’ revenue surges over the past quarters.

United Kingdom
Turning to the UK, the Ting and Weyerer said the country has run a trade deficit with the rest of the world for much of the past few decades. However, its services, rather than goods, account for the majority of trade flows to North America and are the main driver of Britain’s trade surplus.

Although the UK has been a market laggard, Ting and Weyerer believe that the underappreciated opportunity in UK equities – through historically low valuations and as yet unrealized economic strength – mean that it’s worth considering in globally diversified portfolios.

By sector, financials comprise the biggest constituents and, year-to-date, were also the best performers, up 29 per cent. Another positive factor for UK equities is its comparatively higher dividends. The FTSE 100 Index has a 12-month projected dividend yield of about 3.8 per cent versus about 1.8 per cent for global equities as measured by the MSCI AC World Index.

Given the political instability in France and Germany, they think that the UK has the opportunity to take the reins as an undervalued European bright spot. Trump also said that the EU “treat us very, very badly,” and has threatened to hit the EU with tariffs. Optimism Ting and Weyerer are seeing among investors towards digital assets could warrant a look abroad as growth in crypto developer talent shifts away from the US. This may signal that the next drivers of blockchain innovation are poised to develop from the UK and parts of Asia where there has been significant adoption. Overall, Ting and Weyerer believe that the long-term growth story for many global markets remains intact with opportunities such as these.