CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
Marcus Weyerer, CFA
Director of ETF Investment Strategy EMEA
Franklin Templeton ETFs
Since the Republican Party’s sweeping victory in November, global investors haven’t been waiting for inauguration day to make reallocation moves.
Investors cheered on the market rally that was prompted by the end of election uncertainty and the prospects of a more pro-business environment to come. But key questions remain over the direction and pace of US inflation amid the expectation of tax cuts, tariffs and the deportation of immigrants.
Valuations for US stocks are now at record highs, which prompts a look abroad to parse global market prospects. Of course, the broader macro landscape to take shape from president-elect Donald Trump’s policies is a tangle of uncertainties. This includes elevated geopolitical tensions that could disrupt energy markets and supply chains and potentially create headwinds for global trade.
Although momentum can continue in US stocks due to double-digit earnings growth expectations and the continuing artificial intelligence (AI) theme, we believe investors with a long-term view should remain mindful of global diversification benefits and opportunities for differentiated risk-and-return outlooks abroad. Consider also how much the US equity market has grown compared to elsewhere around the world.
Exhibit 1: US Equity Market Growth Compared to the Rest of the World
Free-Float Market Capitalization by Region (US$, Billions)
2004, 2014 and 2024
Source: MSCI Inc. as of November 30, 2024. The MSCI EM Index captures large- and mid-cap representation across 24 EM countries. With 1,253 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI World ex USA Index captures large- and mid-cap representation across 22 of 23 developed market countries excluding the United States. With 807 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI USA Index is designed to measure the performance of the large- and mid cap-segments of the US market. The index covers approximately 85% of the free float-adjusted market capitalization in the United States. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
We continue to see investors using both exchange-traded funds (ETFs) and individual stocks as part of a popular barbell strategy—with ETFs covering a wide swath in the middle for accessible and low-cost solutions across a variety of exposures and individual stocks satisfying the high active conviction at the barbell ends. For global exposure, country selection is an important factor and single-country allocation, versus broad emerging markets (EM), allows investors to tactically target the economies in which they hold higher convictions. Note the wide dispersion of returns for 2023 when Mexico’s market became the top EM performer, returning about 40%, compared with China’s stock market, which fell nearly 12%.1
Looking ahead to 2025, the good news is that global growth is projected to strengthen somewhat to 3.3% and remain stable through 2026.2 Given the rise in protectionism, however, certain foreign markets appear more exposed to trade risks than others, and US dollar strength may not present equal pressure on all their exports.
Exhibit 2: US Global Trade
US Trade With Other Countries
January–September 2024
Note: Trade in goods only.
Sources: Factset, US Census Bureau. See www.franklintempletondatasources.com for additional data provider information.
Mexico and Canada
Trump has taken tariff aim not only at China but also at America’s two other largest trading partners, Mexico and Canada. But many observers have noted that Trump’s transactional method of diplomacy during his first administration also levied tariffs and leveraged these as bargaining chips. This time around, the market is taking some comfort in Trump’s pick to lead the Treasury, Scott Bessent, who has called for a gradual approach to trade restriction and an openness to negotiate on tariff levels.
Despite the protectionist stance, equity markets in Canada have risen since the end of the second quarter, with the MSCI Canada Index up 28% in US dollar terms.3 Performance was driven primarily by financials and energy sector holdings, and, on balance, we believe the Canadian equity market should find support in strong earnings and growth expectations in 2025. Although Canada may need to make further trade concessions than those already outlined in the current US-Mexico-Canada trade pact (USMCA), it should eventually be able to negotiate a solid agreement for all. Compared to the US market, Canadian stocks also appear to us to be a bargain, and the general election prospects in 2025 may entice markets.
The picture south of the border has been quite different since the end of the second quarter, with the MSCI Mexico Index down roughly 16% in US dollar terms, amid prevailing concerns over President Claudia Sheinbaum’s ability to improve domestic business environment. Mexico’s economy may face an added obstacle if Vice President-elect JD Vance carries out taxes he has proposed on remittances from the United States. For Mexico, the largest remittance recipient in Latin America by dollar amount, taxes could shave more than US$6 billion in inflows per year.4
That said, Sheinbaum has expressed hope that her administration could “continue building joint solutions” with the United States. Many US companies benefit from the USMCA, and Sheinbaum could also lean on them to lobby against major tariff increases. The current USMCA, which was negotiated under Trump, was less detrimental for Mexico than its officials had initially feared. Fresh negotiations may introduce market volatility, but over the longer term we continue to see many economic advantages to investing in Mexico, including its youthful population. In 2024, Mexico's peso has shed more than 15% of its value, contributing to its market underperformance. Given the path of lower interest rates, however, we believe further currency headwinds have already largely been priced. In our analysis, Mexico’s stock valuations are also increasingly attractive. The estimated 2024 price-to-earnings ratio, at 11.8, is on a par with that of Brazil’s and China’s, while return on equity is in line with that of Brazil at about 14% compared with 11% for China.5
Brazil
Latin America’s largest economy is a cyclically oriented market with currently cheap valuations that we believe long-term investors may find appealing. Like Mexico, resource-rich Brazil has a relatively youthful workforce and a low unemployment rate. Among the country’s biggest priorities is a reduction of its deficit to regain greater investor trust, while it holds financial inclusion to be a policy priority.
Although it is the world’s largest exporter of soybeans, Brazil is a relatively closed trade economy, with trade accounting for about 33.9% of gross domestic product (GDP) in 2023. Analysts believe this may leave Brazil relatively less impacted by tariffs compared to Mexico.6 In November, Brazil became the latest emerging market to host the world’s preeminent platform for global economic cooperation, the Group of 20 Summit, in Rio. We recently wrote about the country’s rising role as a geopolitical heavyweight.
China
Trump has pledged a 10% tariff on top of existing China tariffs, which for now appears less severe than the 60% he touted on the campaign trail.
Considering that one of the United States’ largest trade deficits is with China, it may not be easy for Beijing to blunt Trump’s ability to levy tariffs on its exports. What China has previously done is raise tariffs on American goods that are easy to replace from elsewhere (e.g., commodity products such as grain and seafood), but not on items such US-manufactured pharmaceuticals and aircraft. Consequently, Chinese consumers have not paid more for certain imports despite increased duties on some American products, according to studies by the Peterson Institute for International Economics. In 2023, China’s gross domestic output expanded 5.2% after abandoning its zero-COVID policy. While the International Monetary Fund (IMF) has called on China to do more to address its real estate sector woes, it revised up its China growth projections at 5% in 2024 and 4.5% in 2025.7
In our opinion, China’s recent monetary policy stimulus and efforts at real estate stabilization may help to offset external geopolitical turmoil and support a cyclical recovery. We are encouraged by its increasing focus on domestic consumption that may shape long-term investment opportunities in one of the world’s most populous countries. Additionally, China’s financial sector has been the top performer following ongoing financial reforms that have opened the market to foreign investment and the rapid development of fintech innovations.
Exhibit 3: Contribution to World GDP Growth: China and Rest of the World
Contribution to World GDP Growth (Purchasing Power Parity)
2000 to 2023
Sources: FactSet, IMF. Calculations by Franklin Templeton’s Global Research Library. See www.franklintempletondatasources.com for additional data provider information.
Taiwan
We have seen a recent surge in demand for Taiwan, India and Japan single-country ETFs as some investors diversify from China and appreciate the flexibility that ETFs allow in addressing portfolio overweights and underweights. Year-to-date as of the end of November, Taiwan’s stock market has returned nearly 15% in US dollar terms versus just 7.7% for the MSCI Emerging Markets Index.8 Taiwan's government debt-to-GDP ratio is considered to be low and also on a modestly downward trajectory. By comparison, the US deficit for fiscal year 2024 was US$1.8 trillion, which was the third-largest deficit ever recorded, and is expected to widen under the new administration.
Analysts expect an ongoing resurgence in global semiconductor sales to continue boosting Taiwan’s market. Powered by AI and 3D technology, the chips industry is forecast to see growing demand in key markets. Taiwan’s most valuable chip giant plans to further expand its global footprint. In collaboration with Sony and Toyota, Taiwan Semiconductor Manufacturing Company has new plans to build a second plant in Japan. The firm has a stranglehold on the chips supply chain, especially for those powering high-performance AI applications.
Japan
Japan’s economy showed moderate expansion in the July-September period, putting its annualized growth rate at 0.9%9 due to healthy consumer spending.
Exports from Japan rose by 3.1% year-over-year in October 2024, topping market forecasts of 2.2% with a notable rise in shipments of manufactured goods to Association of Southeast Asian Nations member states.10 The weakening yen is a plus for exports, tending to make Japanese products cheaper overseas.
Boosting consumer spending are recent income tax reductions, a strengthening labor market—with annual wage gains above 5%—and record-low unemployment. Additionally, currency dynamics are still favorable, supporting exporters.
As we’ve noted in recent years, Japanese corporates have been implementing investor-friendly reforms and returning more capital to shareholders. Currently, share repurchases are running at roughly four times the average of the past decade.11 Activist investors have been pouring into the market, pushing for more shareholder-friendly boardrooms.
Government officials have also adopted more programs to stimulate domestic savings in equity-linked investments, which we see driving new flows into Japanese stock markets. As global capital market activity accelerates, we believe further deal-making could help unlock shareholder value.
India
Investors in India’s booming equities markets have shown growing optimism over opportunities that may arise in 2025. Even considering the effect of potentially broad-reaching tariffs on Asia, we see the potential for the subcontinent to be an outlier.
Markets known for their low-cost manufacturing, such as India, may benefit from further foreign direct investment as the global shift to “China+1” accelerates. These markets may see greater opportunities to meet worldwide demand and seize a larger share of global manufacturing. This increase in production could help offset the negative effects of higher tariffs on their US exports.
India has been one of the world’s best-performing markets over the past 20 years. We see it as a long-term allocation and one that many investors are underallocated to.
Market watchers believe that Trump is likely to continue multi-year efforts to cultivate India as a strategic partner against a more assertive Beijing, and this bodes well for trade relations. Case in point are the massive new investments in India by major US tech firms like Apple.
According to Bloomberg Economics, the United States is now India’s key trade partner with two-way trade of nearly US$120 billion over the past fiscal year—up more than one-third in five years.
India has an unrivaled vast, young and educated workforce and the country is committed to an impressive infrastructure buildout. While the path of EM returns may be bumpy, we believe there are compelling opportunities stemming from the ongoing AI boom. The new year should also bring more clarity over whether the incoming new Republican administration will actually seek to execute tariffs or use them primarily as bargaining chips in new trade negotiations.
President-elect Donald Trump and Prime Minister Narendra Modi enjoy good relations. Also, we’ve been encouraged by the policy reforms that set a strong foundation for the rise of India’s consumer class.
South Korea
South Korea, one of the world’s most trade-reliant nations, can boast diverse businesses embedded across supply chains for a variety of industries, such as petrochemicals, electric vehicles, appliances and semiconductors. With China as its largest trading partner, a Trump presidency and the potential for potential trade risks looms large.
Concerns over a Trump White House were raised after the president-elect called South Korea a “money machine,” in October, pledging to force Seoul to pay billions of dollars more annually for US troop protection on the divided peninsula. The remarks came shortly after the Biden administration and South Korea reached a five-year cost-sharing deal that raised South Korea’s share of the cost to over US$1 billion, up 8.3% from this year.12
Previously, the United States has expressed an “ironclad” commitment to South Korea, touting Washington’s alliance with Seoul as a “linchpin” of security and prosperity in the Indo-Pacific region and globally, while underlining Seoul’s “sizable” contributions to the upkeep of the 28,500-strong US Forces Korea.
While investors seemed to be adjusting their portfolios to reduce exposure to markets that may be impacted by the potential for Trump’s protectionist policies, South Korean equities may be reaching a level of being notably undervalued, in our opinion. The country’s chip-making fortunes have soured as Samsung’s share in manufacturing cutting-edge chips remains small compared to rivals. The company is investing heavily in technology to ramp up its HBM3E production capabilities. These components are critical for AI applications and have driven competitors’ revenue surges over the past quarters.
The political uncertainty in South Korea reached a fever pitch at the time of this writing. We believe the institutional guardrails in the country are strong enough to withstand testing times. As important reforms, such as those pressing for better corporate governance, are put on hold and political gridlock dominates, it is hard to see an immediate turnaround. With a price-to-book ratio of 0.8, however, South Korean equities are trading at a nearly 60% discount versus emerging markets peers.13 When growth prospects brighten up eventually—for example through a swift resolution of the constitutional crisis, an amicable solution to Trump’s tariffs threats and a narrowing of the technological gap—we believe the market should be well-positioned for a sustained rally.
United Kingdom
The United Kingdom has run a trade deficit with the rest of the world for much of the past few decades. However, its services, rather than goods, account for the majority of trade flows to North America and are the main driver of Britain’s trade surplus.
Although the United Kingdom has been a market laggard, we believe the underappreciated opportunity in UK equities—through historically low valuations and as yet unrealized economic strength—mean it’s worth considering in globally diversified portfolios.
By sector, financials comprise the biggest constituents and year-to-date were also the best performers, up 29%.14 Another positive factor for UK equities is its comparatively higher dividends. The FTSE 100 Index has a 12-month projected dividend yield of approximately 3.8% versus about 1.8% for global equities as measured by the MSCI AC World Index.15
Given the political instability in France and Germany, the United Kingdom has the opportunity to take the reins as an undervalued European bright spot. Optimism we are seeing among investors toward digital assets may warrant a look abroad as growth in crypto developer talent shifts away from the United States. This may signal that the next drivers of blockchain innovation are poised to develop out of the United Kingdom and parts of Asia where there has been significant adoption. Overall, we believe the long-term growth story for many global markets remains intact with unique relative opportunities such as these.
In our view, a recovery in earnings, accelerating AI and blockchain technology, increased private capital investment sparked by stabilizing economic conditions, rising emphasis on sustainable development in emerging markets, and a likely easing of global monetary policy should help global ex-US markets stay above politics and produce solid returns in 2025. US allocations will, in our opinion, rightly remain the cornerstone of most equity investors, and the country’s economic growth will likely outperform both peers and expectations alike. But given the broadening of the rally, and seismic shifts in a geopolitical context, diversification has never been more important. It also has never been simpler to achieve thanks to an ever-expanding range of low-cost, no-hassle and precise instruments like single-country or regional ETFs, rules-based dividend strategies or thematic portfolios.
Endnotes
- Source: Bloomberg. The MSCI Mexico Index is designed to measure the performance of the large- and mid-cap segments of the Mexican market. The index covers approximately 85% of the free float-adjusted market capitalization in Mexico. The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float-adjusted market capitalization. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- Source: “OECD Economic Outlook,” Organization for Economic Co-operation and Development (OECD). December 4, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Source: Bloomberg, as of November 30, 2024. The MSCI Canada Index is designed to measure the performance of the large- and mid-cap segments of the Canada market. The index covers approximately 85% of the free float-adjusted market capitalization in Canada. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- Source: “Latin America braces for US election impact on trade, tariffs.” Reuters. October 21, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Source: Bloomberg, as of December 4, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Source: Bloomberg, November 2024.
- Source: “IMF Staff Completes 2024 Article IV Mission to the People’s Republic of China.” IMF. May 28, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Source: Bloomberg, as of December 1, 2024. The MSCI Taiwan 25/50 Net Total Return Index is designed to measure the performance of the large- and mid-cap segments of the Taiwanese market. It applies certain investment limits that are imposed on regulated investment companies, or RICs, under the current US Internal Revenue Code. With 88 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Taiwan. The MSCI Emerging Markets Net Total Return Index is designed to measure the performance of large- and mid-cap representation across 24 EM countries, covering about 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- Source: “Quarterly Estimates of GDP - Release Archive - 2024.” Cabinet Office, Government of Japan. December 9, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Source: Trading Economics, November 20, 2024. There is no assurance that any estimate, forecast or projection will be realized.
- Sources: Bloomberg, FactSet, QUICK Workstation, INDB, Morgan Stanley Research.
- Source: “Trump Says ‘Money Machine’ Korea Should Pay More for US Troops.” Bloomberg. October 15, 2024.
- Sources: Bloomberg, FTSE.
- Source: Bloomberg, as of December 9, 2024. The FTSE 100 Index tracks the 100 largest public companies by market capitalization that trade on the London Stock Exchange. The MSCI ACWI captures large- and mid-cap representation across 23 developed markets and 24 EM countries. With 2,650 constituents, the index covers approximately 85% of the global investable equity opportunity set. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- Ibid. There is no assurance that any estimate, forecast or projection will be realized.
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All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal. Investments in equity-linked notes often have risks similar to their underlying securities, which could include management risk, market risk and, as applicable, foreign securities and currency risks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact an investment. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
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