As with any investment, your capital is at risk.
Turning a corner
Although distant in most peoples’ memories, international markets fared far better than the S&P 500 in the decade that preceded 2008. We acknowledge that two months is not a meaningful time period, but in 2025 so far, international markets have outperformed their US counterparts, with longstanding laggards such as Germany, France, and Hong Kong all recording double-digit returns. At the same time, sentiment toward the magnificent seven has cooled.
What is behind these shifts? Better than expected economic data has come out of Europe and Japan in recent months; in contrast, the US economy disappointed. For example, Japan’s GDP expanded at an annualized rate of 2.8 per cent in the final quarter of 2024, significantly exceeding consensus analyst estimates and marking the third straight quarter of expansion. Growth in the Euro area has also shown signs of improvement, while at the same time inflation is beginning to moderate. In the US, inflation has proven more stubborn than expected and growth has been slowing.
Emerging Markets’ opportunity
Turning to Emerging Markets, sentiment toward China also became more positive over the past couple of months, with several Chinese technology names enjoying a sharp rebound. This follows the news that Chinese business Deepseek confounded expectations and built a high-performing large language model used by technology behemoths Tencent and Alibaba, as well as burgeoning electric car manufacturer, BYD, at a fraction of the cost incurred by western AI platforms. Deepseek’s accomplishment raised doubts about the value accrued to investors from massive AI-related spending on graphics processing units made by US business NVIDIA. It also triggered a debate over whether American companies can maintain their AI dominance. The fact that the Chinese authorities recently adopted a more accommodative stance and pledged their support toward the country’s technology champions has also supported their shares and bodes well for their prospects.
Looking ahead
It is impossible to predict the direction of share prices in the coming weeks or months, and indeed this is not something that we at Baillie Gifford seek to do as long-term investors. It does feel like the tide is turning, however.
With a vast and growing opportunity set of over 48,000 companies listed in international markets, far lower levels of concentration than the US, and valuations for international companies comparing favorably across a range of metrics, now feels like an appropriate time to reconsider asset allocation.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in March 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for profit and loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk.
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