Market Commentary

The Torch has been Passed

By Rob Sigler, MBA

July 14, 2025

If we were to poll a broad group of investors, we believe the vast majority would be shocked to learn that that international and emerging market equities have trounced the performance of U.S. equities year-to-date.  Data from MSCI Inc., best known for creating and maintaining widely used stock market indices around the globe, illustrates this clearly. The MSCI International Developed Markets (excluding US) Exchange Traded Fund (IDEV) is up 19.96% through 6/30/25 while the MSCI Emerging Markets ETF (EEM) is up 16.45%.  By contrast, the S&P 500 index, represented by the (SPY) ETF is up 6.05%.  With aggressive tariff policies and an “America First” agenda from the White House, many expected the opposite.  However, in point of fact, MSCI index ETFs that track equity market performance of some of our largest trading counterparties show strong performance YTD through 6/30/25.  Examples include Mexico (EWW) +31.69%, Canada (EWC) +15.41%, Europe (IEUR) +25.01%, Japan (EWJ) +12.63%, China (MCHI) +34.42%, Hong Kong (EWH) +21.75%, and Brazil (EWZ) +30.5%.  The only modest laggard is India (INDA) +5.78%.  We believe this trend will continue.

Our case for continued international and emerging market equities outperformance is built upon the following pillar.  We believe the combination of a weaking U.S. dollar, more accommodative fiscal and monetary policy outside the U.S., anti-American sentiment resulting from tariff imposition, fading U.S. exceptionalism, and finally huge valuation disparities, will provide further fuel for fire.  Let us examine each.

The U.S. Dollar Index (DXY) measures the U.S. Dollar’s strength relative to six other major currencies:  the Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, and Swedish Krona.  It has appreciated roughly 30% over the course of the last fifteen years, however, has fallen sharply by roughly 10% year to date.  Not coincidentally, that period of dollar strength lines up perfectly with substantial outperformance of U.S. equities versus international and emerging equities.  Why?  As opposed to buying a domestic stock, when you purchase a foreign equity, you buy it in its local foreign currency.  As such, part of the return on the investment is the performance of that currency.  This is easily illustrated with a quick example.  Suppose you own a Japanese auto company in Japanese Yen.  If the stock appreciates +5% while the Yen depreciates by -10%, you are down -5%.  Thus, recent U.S. Dollar weakness means that foreign currencies are rallying.  This provides a powerful tailwind to foreign equities from positive foreign exchange translation.  As you can see in the following illustration, periods of U.S. Dollar weakness historically have been accompanied by cycles of international outperformance.

However, can we count on a stagnant to weakening dollar?  The answer is likely yes.  Unfortunately, our country has a major budgetary problem.  Roughly 13% of our total federal outlays are spent covering interest expense on the federal debt.  Meanwhile, the two largest budgetary spending categories, Social Security and Medicare, have looming problems.  The Medicare Hospital Insurance Trust Fund and the Social Security Old-Age and Survivors Insurance Trust Fund are projected to be extinguished in 2033, and 2034, respectively (source:  Annual Trustee report released in June 2025 by the U.S. Treasury).  Don’t panic!  That does not mean the programs will go bankrupt.  Rather, only 89% of projected Medicare expenses and 81% of Social Security payments will be covered by payroll taxes at that point.  To fill the gap, we must raise taxes, cut benefits, or issue more government debt to fill the void.  Given little political will to pursue the first two options, investors worry the latter option will be the lever pulled.  Fear of more debt puts pressure on the U.S. dollar as our credit worthiness declines.  We do not foresee this trend ending in the short run.  Thus, foreign equities should have a tailwind for the foreseeable future.

Second, the rest of the world enjoys more accommodative fiscal and monetary policy than the U.S.  While many will point to the just passed “Big Beautiful Bill” as a massive fiscal stimulus, it is important to realize that most of the expense of this bill simply maintains the status quo.  Tax breaks originally granted in the Tax Cuts and Jobs Act of 2017 were set to sunset at the end of 2025.  Many have now been extended into perpetuity.  By contrast, international and emerging market countries are engaged in massive new fiscal programs.  Here are just three examples.  Germany recently embarked upon a $1 trillion dollar spending plan to boost defense and infrastructure.  China unleashed a bazooka to support the property sector, backstop local municipal debt, and catalyze consumption.  Finally, India unveiled numerous capital expenditure measures to boost infrastructure, agriculture, as well as support small and mid-size business formation.

Additionally, monetary cycles are not synchronous right now.  The U.S. Federal Reserve has remained on pause since December 2024, opting to wait and see what impact tariffs will have on inflation before making any decisions to lower interest rates.  By contrast, many major economies have already achieved their inflation targets and are firmly in accommodation mode.  While not an exhaustive list, central banks representing the Eurozone, the UK, Canada, China, Australia, and New Zealand, in addition to major emerging markets like Mexico, Brazil, and India have all eased in 2025.  Lower rates stimulate capital investment, home buying, durable goods purchases, and reduce the debt burden on consumers.  This puts international and emerging markets in a position to see relative outperformance versus the U.S.

Third, the rapidly expanding trade war has coincided with a substantial upswing in anti-American sentiment.  According to Goldman Sachs, the U.S. economy could lose $90 billion this year as global consumers boycott American products and travel.  Other forecasts are more austere.  For example, an April YouGov poll showed that 61% of Canadian adults have started boycotting American companies, while a University of Cologne survey indicated that 1 in 3 foreign consumers rejects buying U.S. products altogether.  If we don’t resolve the tariff issue soon, this will be an impediment to sales and earnings growth for U.S. companies.  Conversely, if that consumer demand gets rerouted to other international countries and companies, they should see better relative performance.

Fourth, one of the common themes over the last decade is that American companies enjoy a substantial competitive advantage relative to foreign peers.  This is borne out of the view that American companies command dramatic technology leadership and that technology integration is seeping into all industries.  This has broadly become known as U.S. exceptionalism.  That said, this theory is being challenged.  The realization that China-backed, DeepSeek, a large language AI model similar to ChatGPT, was produced for 1/20^th the expense, using 1/10^th of the processing power, and taught in a fraction of the time, indicates that the Chinese are considerably more advanced than thought.  China now leads in AI patents filed annually and boasts a higher rate of AI adoption throughout industry.  Additionally, they are now the leaders in electric vehicles, robotaxis and other autonomous driving vehicles.  Given their supply chain advantages in rare earth minerals, they also have developed a sizeable advantage in lithium battery production.  In the renewable energy category, they lead in solar and wind power installations and sales.  Finally, in robotics, they lead in granted patents, accounting for nearly 35% of global total.  Our aim here is not to frighten our clients, it is simply to acknowledge that sometimes popular narratives are backward looking.  To illustrate, the American automobile industry produced 75.6% of the worlds’ automobiles in 1950 (source:  Department of Energy).  By 2020, that figure was 11.4%.  Seemingly unassailable industries often see their competitive advantage erode over time.  In our mind, given this risk, diversification amongst countries and foreign equities resonates with Westshore’s philosophy of risk mitigation.

Finally, the entry point for international and emerging equities is compelling.  The valuation discrepancy between U.S. and rest-of-world equities has widened out to 2 standard deviations, meaning foreign equities only trade this cheaply relative to the U.S. roughly five percent of the time.  Meanwhile U.S. equities are trading at 22x forward earnings, very close to the high-water mark they hit during the 2000 Internet Bubble.

Bottom line, international and emerging market equities are outperforming.  The fundamental catalysts that can propel a continued run are in place.  And finally, your valuation entry point looks quite attractive.  How are we capturing this trend at Westshore Wealth for our clients?  You may recall that we raised our emerging market allocations in 4Q24 after publishing a piece entitled The Stars Are Aligning for Emerging Markets https://westshorewealth.com/the-stars-are-aligning-for-emerging-markets/ in September 2024.  Thus, we have already taken one bite at the apple.  As we periodically rebalance portfolios, rather than tapping international and emerging market equities back down to target, we will make a tactical shift to allow the overweight to flex higher.  We believe this sets us on a path for continued outperformance.

We welcome any questions that you may have.

 

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