Why international equities are back on the radar for diversified portfolios

For much of the past decade, US equities have dominated global investment portfolios. However, 2025 has marked a notable turning point, with international markets outperforming Wall Street as investors seek broader diversification amid valuation concerns and shifting global dynamics.

While US markets still delivered solid returns, they lagged behind many overseas peers. Global equity indices excluding the US significantly outperformed, driven by strong rallies across Asia, Europe, and emerging markets. This divergence highlights a growing reassessment of risk concentration in US assets, particularly in technology-heavy sectors.

One of the major catalysts behind this shift has been the rapid advancement of artificial intelligence capabilities outside the US. Developments from Chinese technology firms have challenged assumptions that American companies would retain an unassailable lead in AI innovation. These breakthroughs raised questions around the scale of future capital expenditure required for AI infrastructure and weighed on sentiment toward highly valued US tech stocks earlier in the year.

Asian markets have been standout performers. South Korea's equity market surged, supported by substantial gains in semiconductor leaders, while Chinese and Hong Kong equities rebounded sharply as global investors reassessed long-term growth prospects. A softer US dollar also provided tailwinds for emerging markets, encouraging renewed capital inflows into the region.

Europe has also enjoyed a resurgence. Expectations of fiscal expansion in key economies, notably Germany, improved the outlook for growth across the continent. Southern European markets, often overlooked in prior years, delivered robust returns as economic momentum surprised to the upside.

For global fund managers, the message has been clear: portfolio concentration risk matters. With US equities trading at relatively elevated valuations compared to many international peers, investors are increasingly exploring opportunities in markets that were previously under-allocated.

From an Australian perspective, these developments reinforce the importance of global diversification. Relying too heavily on a single market — even one as deep as the US — can expose portfolios to unexpected shocks. International equities, including Asia, Europe, and emerging markets, are once again proving their value as meaningful contributors to long-term returns.

As 2026 approaches, the investment landscape appears more balanced than it has been in years. Rather than a single-market narrative, global equity performance is broadening — offering Australian investors a wider opportunity set and a timely reminder that market leadership can, and does, rotate.

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