Overseas Investment Opportunities: US Policy Shifts Awaken the Sleeping Giants

Nick Niziolek, CFA

We believe:

• “America First” policies may have sweeping global impacts, but they don’t necessarily mean US equities will lead—and they certainly don’t preclude investment opportunities overseas.
• The global equity market is in the early innings—the first at-bats—of a leadership rotation into overseas markets.
• Many US equities offer attractive upside, but the environment has become more nuanced.
• US policy shifts have catalyzed other leading global economies to adapt; we are seeing an increased focus on innovation and stimulative economic policies, both of which can help sustain relative outperformance in overseas equity markets.

In our 2025 outlook, we highlighted the opportunity we saw in overseas markets and our view that the market was only pricing in the downside risks of the evolving geopolitical landscape, while ignoring the potential positive developments. We have been adjusting our positioning so that our clients can benefit from what we believe has the potential to be a multi-year rotation into overseas equities.

Although we expected international markets would deliver positive surprises this year, the speed at which markets have aligned with our view has surprised us. Two months into 2025, global equity markets are performing much differently than they did during the past few years. US equity markets have struggled, and the dollar is in near-freefall relative to most major global currencies, and many international equity markets—especially Europe and China—have performed strongly.

China and European Equities Enjoy a Change of Fortunes in 2025

Past performance is no guarantee of future results. Source: Bloomberg.

To be clear, we still see many opportunities in the US markets, but identifying above-average growth potential will require a discerning perspective. Previous administrations’ policies and the global status quo provided powerful tailwinds to a handful of companies, and many of these are now giving way. Meanwhile, there are a number of factors that can sustain a broader shift from US to non-US equity market leadership.

• The benign interest rate policies that helped propel the US equity market have normalized, creating new pressures for passive and index-based US strategies in particular. Moreover, the President’s policies aren’t targeted to specifically support the multinational mega-cap tech companies that dominate the US equity market. The US market has much less exposure to industries that the administration is focused on supporting—such as manufacturing, shipbuilding, and commodities.
• As the President himself has acknowledged, the course to longer-term economic prosperity has required difficult and painful decisions. At some point, the market will likely begin debating if the administration can achieve the medium-to-long-term economic benefits it has targeted. The near-term pain of tariffs and their short-term economic impacts may be too much for the voting populace to take. If that pain proves to be the defining issue for mid-term elections or the next Presidential election, this could lead to the pendulum swinging dramatically the other way—injecting elevated volatility into the US equity markets.
• A weaker dollar may incentivize overseas investors to rebalance and increase allocations to non-US equities. With US equities lagging and the US dollar down nearly 6% since peaking in early January, the return experience for overseas investors invested in US equities has been even more painful than the experience of US investors with home-country bias in their portfolios. We believe a broader global capital rotation may only be beginning.

The graph below shows the significant non-US ownership within the US equity market. Much of this foreign capital will return home when opportunities at home look more attractive than the US—which we believe is happening now—or the geopolitical situation makes holding US-dollar denominated assets less risky—also likely happening now. Even a reversion to where we were 10 years ago would require a significant flow of capital out of US risk assets and overseas.

If Non-US Investors Get Homesick, US Markets Will Notice

Source: Gary Fowler, UBS, “European equity strategy: ‘MDAX: A lot to like,” March 5, 2025. Past performance is no guarantee of future results. Data as of June 30, 2024.

Waking the Sleeping Giants

The US is acting as a strong protagonist in the economy, but the rest of the world is not standing still. The unintended consequence of the United States’ pro-America policies is that they may have just woken a few sleeping giants around the world.

The reality is the economies of Europe and China have become very complacent over time. While the US has been the center of innovation globally, these economies were content to make things and sell them to the United States. The growth of environmental, social, and governance investing throughout Europe prioritized companies executing on ESG initiatives over the innovation and evolution required to compete globally.

But things are changing—quickly. It is not a coincidence that Europe and China are adjusting course at the same time President Trump is making significant changes to global trade relations as part of a sweeping disruption of the status quo.

In China, President Xi once viewed the innovation within China’s consumer and technology sectors as a threat to his own control and power. Consequently, he embarked on a multiyear campaign to reduce these companies' power and influence, resulting in policies that further damaged an already fragile Chinese economy. However, in the past few weeks, President Xi held a forum with key leaders of the Chinese technology companies—the very same individuals he openly criticized only a few years ago—but this time signaled the importance of these companies to China’s future and showed support for their further innovation and development.

In Europe, the German people voted for the party promising to remove fiscal limits and embark on a stimulus program to reinvigorate the German economy—a marked shift for a country known for its extreme fiscal conservatism. We believe it is highly unlikely that these developments would have occurred if these countries did not stand to lose significantly from the changing geopolitical and trade landscape. As Bob Marley once said, “You never know how strong you are until being strong is your only choice.”

Europe: Whatever It Takes: Part Zwei

Mario Draghi’s “Whatever It Takes” speech on July 26, 2012, is often cited as the turning point for European equities—one that sparked a three-year rally in global risk assets. Germany’s newly elected coalition government and a pivot toward fiscal stimulus may be an equally significant catalyst that marks a turning point in how Germany and the EU view deficit-spending priorities.

The contrast between US deficits and those in Germany and the rest of Europe over the past decade is staggering. If the US is successful in reducing government spending and deficits at the same time Europe finally loosens its fiscal conservativism, this could support a sustained change in equity leadership.

Germany has proposed massive stimulus that includes €400 billion in defense spending and €500 billion in a special infrastructure fund, both expected to be spent over a decade and accounting for Implementing this amount of spending—over 20% of GDP—requires changing Germany’s constitutional limits around deficits, but the support seems to be there. This spend would benefit German companies, as well as its trading partners across Europe and Asia.

Germany changes course and embraces a new approach to deficits

Source: Deutsche Bank, using Finaeon, Haver Analytics, Deutsche Bank.

Changing approaches to deficits could have significant implications for global equity leadership

European equities offer attractive valuations

Source: BNP Paribas, “Trade Wars & Germany’s Whatever It Takes,” March 5, 2025. Past performance is no guarantee of future results. Budget balance % of GDP using Bloomberg, Datastream, BNP Paribas Exane estimates; 12 month forward P/E using Bloomberg, Polymarket, Datastream, BNP Paribas Exane estimates.

A resolution of the Ukraine-Russian War could be an additional boon, resulting in reduced inflationary pressure and the stimulatory benefits unleashed by a “Rebuild Ukraine” campaign. Increased stimulus out of China could also serve as catalyst for Europe, given still-close economic ties.

Many industries can benefit from these inflections in Europe, but companies in the industrials and financial sectors are likely best positioned in the near-term given relative valuations, direct exposure to key stimulus industries, and the breadth of well-known companies that have been under-owned in recent years. In recent months, we have added to our portfolio’s European banking exposure, defense companies domiciled in Europe and Asia, and European industrial and commodity companies. We have increased our portfolios’ allocations to German companies, but because these changes will benefit most of Europe, we have been increasing exposure throughout the region.

China: National People’s Congress, Tech Summit, and Tariffs

The first indication that conditions in China were changing occurred in late September 2024 when the People’s Bank of China (PBOC) announced new monetary policy measures, followed by high-level Politburo economic meetings that announced additional fiscal support.

As often is the case with these types of inflections, investors reacted rapidly and, in this instance, likely overreacted to the upside in the near term. Since then, the Chinese equity market has consolidated as details about the stimulus measures have emerged and investors digest the impact of new US tariffs. However, unlike some of the China equity rallies we’ve seen in recent years that ultimately disappointed, we’ve seen more positive developments this cycle, with many Chinese equities now testing or breaking out to new highs.

President Xi’s decision to extend an olive branch to the leaders of many of China’s most innovative companies could open the door to compelling investment opportunities. With proper support, China has the potential to be a global leader in key industries, such as artificial intelligence and autonomous driving. Initial indications from the National People’s Congress suggest that the government is ready to provide as much support as needed to achieve its 5% economic growth target and offset any negative impacts from increased US tariffs. This commitment should provide a floor under the Chinese equity market, which is why we’ve seen positive market reactions on days when the US has announced new tariffs on Chinese goods.

There are many opportunities to benefit from the inflection we see in China. For example, we have increased Calamos Evolving World Growth Fund’s (CNWIX’s) allocation to Chinese companies. Our diverse exposure includes significant weightings to large technology and consumer platform companies we believe will benefit not only from China’s economic recovery and improving consumer confidence but also from the integration of AI technology into their core products. In addition, we’ve identified small- and mid-cap opportunities more directly exposed to the local technology supply chain, stimulus measures, and the stabilization of the real estate market. To minimize volatility in the Chinese equity market, we continued to leverage our expertise in convertible bonds to layer in downside risk mitigation.

Conclusion

In 2024, most of our portfolios significantly outperformed their benchmarks. Even so, as the year came to a close, we understood the market environment was likely to change in 2025, and we proactively began repositioning our portfolios. The markets have shifted sharply and quickly, and our portfolios have given back some ground. However, what we are seeing in the markets is typical of early-stage rotation and especially unsurprising given the geopolitical backdrop.

We’ve reacted swiftly and believe we have identified an exciting group of investment opportunities that will benefit from increased stimulus out of China and Europe and the relative strength we expect from European and Asian equities. Our portfolios remain diversified across a range of cyclical and secular themes, and we are excited that the breadth of opportunities has expanded, and previously out-of-favor markets are enjoying renewed interest.