Investment Implications

Global Opportunities

As noted at the start of this outlook, I believe the drivers of US outperformance in global markets are fading—but this is not a call to short the US equity market. US equities remain expensive relative to global peers, but they also offer higher returns on capital than other markets, which justifies a premium valuation to peers (Exhibit 16).

What I am making is a bullish relative call on non-US markets—especially emerging markets and Japan, where I see a better risk-reward trade-off than in US equities. In my opinion, investors that have been overweight US equities should consider reallocating capital to markets poised to benefit from attractive earnings growth, a weaker US dollar, and more attractive relative valuations.

Outside of the United States, valuations start at materially lower levels, which means earnings growth expectations are much less demanding. Emerging markets are particularly appealing, and they can offer AI exposure at far lower valuations alongside multiple other uncorrelated growth drivers. Risks from geopolitical intervention remain, but no country offers complete refuge from that.

Japanese equities look attractive as well. Even if GDP growth remains modest, Japan offers strong prospects for rising ROIC due to ongoing governance improvements, changes in the corporate takeover code, and policy support for domestic consumption.

Fixed Income and Currencies

Across developed markets, the outlook for fiscal discipline is bleak. US federal deficits are likely to range between 6%–8% of GDP each year for the foreseeable future, while European deficits are likely to expand due to higher defense and infrastructure spending commitments. Japan could also experience larger deficits due to the fiscal measures previously outlined. All told, I believe investors will increasingly demand higher term premia for long-duration government bonds while questioning whether other safe havens might be preferable. Within the sovereign debt arena, I expect EM debt to be a beneficiary of this trend, as many offer lower debt-to-GDP ratios (Exhibit 17), more orthodox monetary policies, and FX appreciation potential.

Alternative Assets

With traditional safe havens in question, real assets are also likely to gain more attention as investors seek pricing power in the event of sustained higher inflation and asset price appreciation as replacement costs rise. Infrastructure is a particularly appealing asset class, but security selection is critical. I believe investors should focus on infrastructure assets with contractual pricing power that provide inflation-fighting characteristics. I also would caution against grouping all infrastructure assets into the same bucket, as assets such as data centers may not be as reliable as toll roads, railroads, or other utilities with stronger pricing power and limited obsolescence risk.

Convertible arbitrage strategies are another strong contender as they can monetize volatility. A tumultuous geopolitical backdrop combined with the potential for AI-driven disruption will likely fuel more volatility over time, creating opportunities for investors with extensive experience in the arena.

Conclusion

Investors are facing a different investment landscape from that of the last two decades. Non-US opportunities can increasingly deliver on the promise of technological innovation and earnings growth across a diverse array of countries and sectors, while also offering currency appreciation potential and lower valuations. Against a backdrop of a weakening US dollar, steepening developed market yield curves, and strengthening non-US relative performance, now could be an opportune time for shifts in asset allocation, taking into account a comprehensive assessment of risk and reward.