Capital Group: New drivers stimulate non-US equities
Non-US equities are looking increasingly attractive, according to Capital Group. New forces such as fiscal stimulus in Germany, reforms in Japan and South Korea, a weaker dollar, a more stable China and better policy in Europe are accelerating this shift, according to two portfolio managers at the asset manager.
‘The starting position for non-US equities looks constructive. Initial valuations are much lower than in the US. Many companies are also domestically focused and are not affected by disruptive US policy. Corporate governance is also improving in a number of regions,’ says Samir Parekh.
The currency markets also suggest potentially slower growth in the US, a more accommodative Federal Reserve and lower real interest rates. This makes the dollar less attractive, as the difference in real, inflation-adjusted rates between the US and other countries has narrowed.
German stimulus sets new tone for Europe
Europe is experiencing a “whatever it takes” moment. The European Union is fully committed to economic revitalisation following Mario Draghi's report and also wants to respond to the increasing trade tensions with the US and China.
Germany is known as Europe's largest economy and is often associated with strict budgetary discipline. In March, it announced a major budget stimulus, one of the most significant policy changes since German reunification in 1990. Observers also expect regulations to become more pro-investment and open to change.
‘The German stimulus will benefit Europe. We could see a stronger industrial cycle over the next three years. But it will take time for the measures to be implemented and have an impact on the economy,’ said Gerald DuManoir.
European banks have become more profitable and built up substantial capital reserves. They stand to benefit from government spending, as do companies in defence, construction materials and infrastructure. Other attractive companies – including insurers, telecom operators and utilities – are seen as resilient dividend payers with minimal exposure to the levies. Some may benefit if the euro continues to strengthen against the dollar.
Trade and business reforms in Japan
Japan could benefit from shifting trade alliances. The country's average tariff remains one of the lowest in the world. In recent years, Japan has emerged as a free trade powerhouse, with agreements such as JEFTA, TPP and RCEP. It signed trade and digital agreements with the US during the first Trump administration and continues to cooperate in areas such as 5G networks, space exploration and medical research.
Japan is also undergoing a revival in corporate governance. Profitability reforms still have some way to go, but they have contributed to the robust returns for the MSCI Japan Index since 2023.
South Korea is following Japan's playbook, but is still in the early stages. Seoul is asking companies to focus on increasing their return on equity and book value. Possible outcomes include higher dividends, share buybacks and asset disposals.
Stimulus in China
China's measures to counter high US tariffs could also indirectly benefit Europe, one of its largest trading partners. The new tariffs will not make life easy for China's export-driven economy, especially if Chinese manufacturers start saturating markets with goods that previously went to the US.
However, greater stimulus measures could create a favourable climate for Chinese companies that are focused on the domestic market, allowing them to benefit from the country's enormous savings.
Importantly, China is taking a more positive stance towards its entrepreneurs. Senior Chinese officials want to capitalise on the global impact of DeepSeek and its AI training model, and are more vocal in their support for companies in technology and electric vehicles. In February, for example, Chinese President Xi Jinping and key party leaders held a rare meeting with the country's most prominent entrepreneurs.
