For the first time in many years, the picture is brightening for non-US stocks. There are new catalysts accelerating change: fiscal stimulus in Germany, corporate reforms in Japan and South Korea, a weakening US dollar, signs of stabilisation in China, and an improving policy environment in Europe.

Non-US stocks have had a bright start to the year: the MSCI Europe, MSCI EAFE and MSCI ACWI ex USA indices have all notched solid gains amid a sharp decline for the S&P 500.

“Since the 2 April tariff announcement, US and non-US stocks have been highly corelated, which is what one would expect in a period of heightened market volatility,” says Samir Parekh, equity portfolio manager. “Once the dust settles, the setup for non-US stocks looks constructive. Starting valuations are much lower relative to the US. Many non-US companies have domestic businesses not exposed to US policy disruption, and corporate governance is improving in certain regions.”

And in currency markets, movements suggest the possibility of slower US growth, a more accommodating Federal Reserve and lower real interest rates. The dollar appears less attractive, as the differential in real (inflation-adjusted) rates between the US and other countries has shrunk.

German stimulus sets new tone for Europe

In Europe, it is billed as the “whatever it takes” moment. Member states of the European Union are focused on economic revitalisation, in light of a report on competitiveness by economist and former Italian Prime Minister Mario Draghi, as well as increasing trade tensions with major trading partners, such as the US  and China.

Germany, Europe’s largest economy and often known for its austerity, announced a large fiscal stimulus in March, one of the most significant policy changes since the reunification of East and West Germany in 1990. There is also a sense that the regulatory environment may become more pro-investment and open to change.

“I’m relatively optimistic,” says Gerald DuManoir, equity portfolio manager. “Stimulus from Germany will benefit Europe, and we could see a stronger industrial cycle over the next three years. That said, it’s going to take time for stimulus to be implemented and work its way through economies.”

European commercial banks, which have become more profitable and amassed significant capital reserves, are poised to benefit from government spending, as well as companies related to defence, building materials and infrastructure. A pool of attractive companies — European insurers, telecom operators and utility providers, for example — are seen as resilient, dividend-paying stocks with minimal tariff exposure. Some may benefit if the euro gains further strength against the dollar.

“There is a greater recognition in Europe that they need to be self-sufficient,” Parekh says. “The fact that Europe is focused on supporting their economy in the face of what they see as adversarial US policy is likely to have positive ramifications for many companies.” 

It may take until 2026 to see a meaningful growth pickup in Europe, given the near-term impact of tariff uncertainty. Plus, execution remains in doubt under new German Chancellor Friedrich Merz. He initially faced difficulty securing votes, which may be a setback as he seeks to gain wider consensus within Germany and from other European countries pushing for faster reforms.

Japan could get boost from trade and corporate reforms
 

Japan could benefit from shifting trade alliances. The country’s average tariff rate remains among the world’s lowest, highlighting the potential for productive negotiations amid rising trade war fears.

In recent years, Japan has emerged as a free trade powerhouse, with agreements such as JEFTA, TPP and RCEP. It struck trade and digital agreements with the US during the first Trump administration and continues to collaborate in areas like 5G networks, space exploration and medical research.

Japan is also undergoing a corporate governance revival. Reforms around profitability still have a way to go and have helped drive robust returns for the MSCI Japan Index since 2023.

Similarly, South Korea is in the early innings of adapting Japan’s playbook. It wants companies to focus on boosting their return on equity and book value. Potential outcomes could include larger dividends, share buybacks and asset divestitures. 

China may bolster its economy with stimulus
 

To counter high US tariffs, China’s leaders may enact stronger stimulus measures, which might indirectly benefit Europe, one of its largest trading partners. China’s export-led economy is likely to be challenged by the new rates, especially if its manufacturers saturate other markets with formerly US-bound goods.

Larger stimulus might create a favourable environment for domestic-focused companies that could benefit from the country’s huge consumer savings stockpile.

Importantly, China’s policy is pivoting in a more positive direction for its entrepreneurial economy. Top officials, seeking to capitalise on the global splash of DeepSeek and its AI training model, have become more vocal in their support of companies in technology and electric vehicles. For instance, in February China’s President Xi Jinping and top party leaders hosted a rare meeting with the country’s most prominent entrepreneurs. 

Valuations remain attractive
 

Over the last few years, cheaper valuations compared to similar US businesses have been the main argument in favor of non-US equities. But new catalysts are changing the narrative for the first time in years. Moreover, in an environment where infrastructure spending rises, non-US markets are more diverse and weighted higher in heavy industry, energy, materials and chemicals than the S&P 500.

The MSCI ACWI ex USA trades at 13 times earnings on a 12-month forward basis, while the MSCI EAFE (developed international) trades at 14 times — both near their 10-year averages and at a substantial discount to the S&P 500, which trades at 20 times earnings.

Of course, non-US stocks have long been inexpensive for a reason. Earnings growth has been anaemic compared to the US and its vibrant technology sector over the past decade. If earnings growth rebounds across non-US markets, price-to-earnings ratios could rerate higher.