International equities, which powered past U.S. equities in the first quarter of 2025 after years of bringing up the rear, could see a continued pickup in inflows if the globe-spanning tariff regime President Trump unveiled April 2 helps make diversification fashionable again.
Sharp setbacks since the start of the year for "Magnificent Seven" technology giants Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla, accelerated over the past week by the threat of unprecedented tariff increases, have refreshed the truism in investors' minds about not putting too many eggs in one basket — or seven baskets for that matter, analysts say.
Institutional investors haven’t wanted to diversify away from highly concentrated exposures to the Magnificent Seven, which accounted for roughly 30% of the S&P 500 index for much of 2024, as long as that was working for them, said Elias Erickson, lead portfolio manager for Ninety One’s international equity franchise strategy.
Now, however, relatively steep year-to-date declines through April 8 of 45% for Tesla, 31% for Apple, 28% for Nvidia, 23% for Alphabet, 22% for Amazon, 16% for Microsoft and 13% for Meta have renewed interest in broadening exposures, “and international is a good place to do that,” he said.
In a market where the Magnificent Seven are garnering less laudatory monikers now such as the "Meltdown Seven," Meketa Investment Group is working with clients previously comfortable with allowing market gains to push their domestic equity exposures past target ceilings to rebalance more often — a goal that has left Meketa busy on the international equity front now for 18 to 24 months already, said Hayley Tran, managing principal and head of equity research.
Other portfolio managers report similar changes afoot this year.
Julian McManus, a portfolio manager on Janus Henderson’s global alpha equity team, said his efforts last year to convince investors that the Magnificent Seven’s fantastic run in recent years had left them overcrowded and overvalued fell for the most part on deaf ears.
"I was banging my head" against a wall of “recency bias and confirmation bias [arguing that] the stage is set to make some really supernormal returns in international for the next few years," he said.
“Fast-forward to this year, and the phones are ringing off the hook,” McManus said. Everyone wants to know where they should be allocating to international, he said.
According to a Janus Henderson spokesman, the Overseas Fund McManus oversees had roughly $3.4 billion in assets under management at the end of February, while his Global Select Fund had about $2.8 billion.
Trump’s popping of a globalization bubble, meanwhile, could ironically accentuate the charms of other key markets, including Europe and China, portfolio managers say.
The newly imposed U.S. tariffs — up to a staggering 104% for China as of April 9, as well as 24% for Japan and 20% for the European Union, among roughly 57 others — sent equity investors around the world rushing for the exits as they pondered the implications of a global free trade system without the U.S. at its core.
Despite the resulting spike in volatility, which in more normal times could lead to safe haven dollar buying, the U.S. currency has weakened, buying ¥146.28 yen in April 9 trading, down from ¥149.28 yen a week ago, while the euro buys $1.0958, up from $1.0855 a week ago — an additional attraction for U.S. investors looking at international equities now, said Erickson.
This time around, concerns about the impact of tariffs on U.S. economic growth are offsetting that impulse to seek safety in the dollar, portfolio managers say.
Lasting damage to U.S.
Analysts said the impact of the president’s unprecedented moves on the global economy will likely take months to fully grasp; the potential hits for the U.S. could be particularly far-reaching if a Fortress America prompts other major trading nations to rewire supply chains and trading relationships.
The U.S. accounts for about 20% of global GDP, but that still leaves the bulk of the broader opportunity set elsewhere, said Christian Heck, a portfolio manager and senior research analyst with First Eagle Investments.
Efforts by countries accounting for the other 80% of world GDP to establish closer trading relationships could lead to considerable unintended consequences, he said.
One consequence of the U.S. opting to become a wallflower at the global trade party could be renewed interest in the benefits of diversification, market participants say.
“As we deglobalize, the one thing that comes up as a result is that correlations between regions actually start to fall,” said Nelson Yu, New York-based senior vice president and head of equities with AllianceBernstein.
That, in turn, incentivizes investors who might have grown lax in rebalancing their high-flying U.S. exposures — as the Magnificent Seven went from strength to strength in recent years — to get back to properly balancing their portfolios, securing diversification benefits in the process “that you haven’t had for … two decades,” Yu said.
Between 1985 and 2015, correlations of monthly returns between U.S. and non-U.S. equity markets, as measured by the Russell 3000 and MSCI EAFE indices, doubled to 0.9 from 0.45 as the pace of globalization picked up speed, Yu said.
But with the rise of trade barriers and localization of supply chains over the past decade, those correlations have begun to retreat, slipping to around 0.85 at present, he said. A continuation of those trends should help global investors achieve greater diversification going forward, he said.
Relatively low valuations for international equities and the potential for greater monetary and fiscal stimulus from policymakers in those markets, relative to the U.S., are additional reasons U.S. investors may want to broaden their exposures now, portfolio managers say.
The confrontational and abrasive way in which the incoming U.S. administration dealt with the European Union “has been a real wake-up call” for decision-makers there, prompting leadership in key countries such as Germany to conclude that they have to spend a lot of money to build up their defense capabilities and infrastructure, said Janus Henderson's McManus.
“You have monetary policy getting more positive, more growth-centric in Europe, whereas the U.S. is still in wait-and-see mode,” said Ninety One’s Erickson. “You also have more fiscal stimulus coming in the EU, which is looking to address some deficits in previous spending on defense. So there are different reasons to think that there might be a reawakening of Europe,” which could prompt rebalancing to international strategies after a long period of American exceptionalism, he said.
Erickson, in a March 17 interview, said his International Franchise strategy, which Ninety One launched in 2019, built a track record over the ensuing four years that has delivered 100% upside in rising markets but only 80% downside capture. On the strength of that record, inflows over the past two years have helped lift assets under management to $1.5 billion from $130 million in January 2023.
For 2024, the strategy posted a 10.2% gain, besting its MSCI ACWI ex-U.S. benchmark's $5.5% return.
Jeff Blazek, managing director and co-CIO of multiasset strategies with Neuberger Berman, likewise cited the growing willingness of governments in Europe to engage in deficit spending as a factor behind his team’s decision last month to overweight international equities.
“We have upgraded developed international stocks because we do think [those governments] are going to demonstrate willingness to use their fiscal budgets to run some modest deficit spending, particularly in Germany,” catalyzing what Neuberger thinks will be an improvement in their outlook relative to the U.S., he said.
Neuberger’s $12 billion multiasset team offset that international equity overweight by underweighting fixed income while maintaining neutral exposure to U.S. stocks. The result is a broad equity overweight, reflecting the team’s belief that this is going to be an attractive time to put new money to work in stocks, Blazek said.
For the most part, however, changes investors are making now to the balance between international and domestic equities have been more defensive in nature, closing underweight positions in international.
Ian Toner, chief investment officer for Verus Advisory’s discretionary and non-discretionary businesses, said “We’ve gone from…underweight international relative to domestic to more neutral international,” reflecting both the uncertainties and the potential opportunities presented by the latest dramatic developments.
Weigh the long-term effects
And Toner counseled against more dramatic moves for the near term.
“It’s appropriate to think about the immediate response, but it's more important for long-term portfolios to work out over the next few weeks how those chips are going to fall, because you don't want to make big structural changes based on very short-term things without really understanding the direction of structural travel," he said.
The first and second cut of analysis aren’t likely to fully capture the complexities of the new environment, he warned.
If the top-down environment has suddenly become more complex and uncertain, portfolio managers say a bottom-up approach should still be capable of constructing portfolios that can navigate the environment coming together now.
Paulina McPadden, a co-manager of Baillie Gifford’s $1.5 billion International Concentrated Growth Equities strategy, said that despite increasing trade barriers — even the significant increases just announced by the U.S. — the result is likelier to be a shift in flows as opposed to a fall in trade volumes, with local publicly-listed champions focusing more on markets in their own backyards rather than the U.S.
She pointed to Shenzhen-based electric-carmaker BYD Co. — which Baillie Gifford’s International Concentrated Growth Equities strategy added to its portfolio over the past year — as an example of a firm that can continue to thrive in a world where access to the U.S. market looks set to become a much rarer commodity.
BYD is “killing it in their home market, in China,” agreed Janus Henderson’s McManus.
They’re developing better electric-vehicle technology than Tesla, he contended, citing the firm’s just-announced breakthrough allowing vehicles to be charged in just five minutes — twice as quickly as Tesla.
Trump’s imposition of a 25% tariff globally on cars would, in theory, make life quite difficult for a carmaker such as BYD, but “when I’m thinking about their ability to make significantly cheaper cars than anybody else, the fact that they’ve been internationalizing their production for a number of years and the fact that when I think about the upside possible for this company, none of that requires any sales in the U.S. — all of that leaves me still feeling quite excited” about the company’s prospects.
Starting from the second quarter of 2024, McPadden and her colleagues have built a 1.5% position in BYD.
From the end of last year through the start of 2025, meanwhile, the team sold off a similarly sized, long-held position in Tesla — even though that holding had delivered very attractive returns for Baillie Gifford’s clients over the years, she said.
The team reduced its holdings in Tesla dramatically from the tail end of 2024 as the stock’s valuation soared in the wake of the U.S. presidential election, and closed out its position in the first quarter. That reflected an expectation that with increased competition Tesla’s car business would be challenged to match the growth of the past five years over the coming five years. Success for Tesla’s potential second acts — such as humanoid robots or autonomous driving — seem far less certain, she said.
McManus said “you can buy Tesla for 100 times earnings in the U.S., or you can buy BYD in China for 20 times."
And unfortunately for Tesla, he said, it looks as if the company is going to be limited to the U.S. market for now because their sales are falling off a cliff in China and Europe, whereas BYD is running with the ball right now in China and actually making good inroads into Europe and the rest of the world.
McManus said his strategy began buying BYD’s stock over the past six months, with the company currently accounting for roughly 2% of its portfolio.