Global Equities Strategy Commentary – 1Q 2025

Global equity markets (ex-USA) were higher to start the year, with particular strength in Europe. The MSCI World ex-USA Index rose 6.2%, as the MSCI World ex USA Small Cap Index advanced 3.4%. US dollar weakness (-3.9% for the DXY) added to returns. While it is too early to make a call, we have been waiting a long time for the dollar strength headwind to reverse and would expect a meaningful benefit to US-based investors in overseas assets when it finally does.

Most of the market’s return came in January with volatility increasing later in the quarter. Growing trade tensions and uncertainty regarding US-tariff policy, investor rotations in Asia— noticeably a shift from Japan to China—and a sea change in EU governments’ propensity to spend after the German elections, combined with a pause in central bank easing kept markets range-bound later in the quarter. The change in Europe is particularly noteworthy as Germany announced plans to spend up to one trillion euros on a combination of defense and infrastructure. They have the balance sheet to fund this spending without triggering the debt concerns such a plan would engender elsewhere on the continent. This elimination of the German ‘debt-break,’ combined with an under-owned equity market was enough of a catalyst to drive the German DAX Index—up 11.3% in local terms and 15.8% in USD. We think there are better long-term opportunities elsewhere in Europe, but do see the change as meaningful. To be clear, this shift in German fiscal policy potentially has enormous significance. If creditor nations need to repatriate national savings, it can only come from the debtor nations. In addition, if this change represents a shift of monetary authority back to the nation state, it puts into question the authority of Brussels to direct European policy, the implications of which would not stop at Germany. Japan underperformed as investors shifted their focus back to China. We continue to find an abundance of attractive opportunities within Japan, but have been shifting our exposure towards domestically-focused businesses.

It is important not to exclude the US markets from our consideration of global markets. Global equity markets have been caught up in the frenetic shifts in US trade and geopolitical policy. None more so than the US itself. This highlights a potential shift in global investment flows, triggered somewhat by the US market’s relatively high valuation during a time of heightened uncertainty. According to the Fed, foreign ownership of US stocks was nearly $20 trillion at the end of 2024. That is a staggering number, but a significant US equity allocation has clearly been the right choice for foreign investors, at least until this quarter. Even a modest shift in flows to other markets, due to US valuation concerns, the allure of fiscal spending in Europe, or improving prospects in Asia, could lead to broader geographic performance in the near term. Longer term, business fundamentals should drive performance, and much will depend on earnings growth outside the US. In terms of global small cap equities, we have long commented on their attractiveness, particularly in Europe and Japan where stock prices often do not reflect underlying business quality. A combination of relative earnings strength and a renewed focus on geographic diversification could lead to extended period of strong performance for global small cap markets.

Our recent trip to Asia reinforced our view of the region’s dynamism and vast investment potential. We can’t predict whether the recent change in market leadership will continue. We actively seek global opportunities poised for growth and encourage investors to reassess their geographic allocations while the opportunity exists.

US-tariff policy is being announced as of this writing and there remain many open questions. The most important of which is: “To what extent is the US administration’s intent to negotiate trade terms versus raise revenue and reshore manufacturing?” Watch to see how quickly deals are negotiated, with a willingness to deal indicating the intention is more towards the former and likely to be better for equity markets.

Our core approach has not changed. We continue to look for growing companies at attractive valuations. This approach is our preferred method to participate in strong markets, while still weathering the difficult periods.