The Case for International Equities in a Fragmenting Geopolitical Landscape

In 2025, the global investment landscape is undergoing a seismic shift. For years, U.S. equities dominated portfolios, driven by the relentless rise of growth stocks and a singular focus on domestic innovation. But as geopolitical tensions, inflationary pressures, and macroeconomic imbalances have reshaped risk dynamics, a new narrative is emerging: international equities are outperforming U.S. counterparts by 11%, while U.S. growth stocks have declined by 10%. This rotation reflects a recalibration of capital toward markets with improving fundamentals, disciplined fiscal policies, and undervalued opportunities.

Geopolitical Tailwinds and Structural Shifts

The catalysts for this shift are both geopolitical and economic. Europe, once a cautionary tale of fragmentation and stagnation, has emerged as a bright spot. The German election in 2024 catalyzed a coalition government committed to fiscal expansion, including a $546 billion infrastructure fund and relaxed borrowing rules to boost defense spending. These measures have not only revitalized European equities but also signaled a broader commitment to economic resilience. Defense stocks in Europe have surged 35% year-to-date, reflecting renewed confidence in the region's strategic priorities.

Meanwhile, geopolitical overhangs—such as the potential for peace in Ukraine and China's pivot to domestic consumption—have reduced uncertainty for global markets. China's economic rebound, in particular, has provided a tailwind for European companies with exposure to its market, while improved cohesion in Europe post-Brexit has further solidified the continent's appeal.

The Rotation to Value and Defensive Sectors

The market's rotation extends beyond geography. U.S. value stocks have gained 2% year-to-date, outperforming the broader market, as investors seek resilience in a high-interest-rate environment. Defensive sectors like healthcare—driven by secular trends such as aging populations and breakthroughs in GLP-1 drugs—have also attracted capital. This shift underscores a growing preference for companies with durable cash flows and strong return on capital, particularly those insulated from volatile trade policies.

Strategic Capital Allocation: The Role of Active Management

In this fragmented landscape, active management is critical. Passive strategies that once thrived on U.S. growth stocks now lag, while funds targeting undervalued international equities are gaining traction. The Hartford International Opportunities Fund exemplifies this approach. By focusing on companies with sustainable or improving return on capital—often overlooked by the market—it positions investors to capitalize on mispricings in global markets.

As of June 30, 2025, the fund's sector allocations reflect a disciplined tilt toward undervalued opportunities. It is overweight in Consumer Discretionary (10% vs. benchmark's 9%) and Financials (25% vs. 23%), sectors poised to benefit from Europe's fiscal stimulus and global consumption trends. Conversely, it is underweight in Information Technology (13% vs. 18%) and Real Estate (2% vs. 3%), sectors where valuations appear stretched. This strategic positioning aligns with the fund's objective of capturing long-term capital appreciation in markets where fundamentals are improving.

Navigating Geopolitical Risks with Macro-Driven Discipline

The fund's sub-adviser, Wellington Management, plays a pivotal role in its success. By integrating global macroeconomic insights—such as the potential for a sustained rotation into non-U.S. equities and the impact of U.S.-Iran tensions—the fund adjusts its exposure to geopolitical risks. For instance, while U.S.-Iran tensions remain a concern, the fund's focus on companies with strong capital returns and diversified revenue streams mitigates localized shocks.

Moreover, the fund's flexibility to invest in emerging markets—up to 25% of assets—allows it to capitalize on high-growth regions while managing risk. This adaptability is crucial in a world where geopolitical volatility is the new normal.

Investment Implications and Recommendations

For investors, the case for international equities is compelling. With valuations at attractive levels, fiscal stimulus in Europe, and structural tailwinds in China, non-U.S. markets offer a compelling alternative to overvalued U.S. growth stocks. The Hartford International Opportunities Fund's disciplined approach—targeting companies with strong capital efficiency and aligning with macroeconomic trends—positions it to outperform in this environment.

Consider the following steps:
1. Rebalance Portfolios: Reduce exposure to overvalued U.S. growth stocks and increase allocations to international equities, particularly in sectors like Financials and Consumer Discretionary.
2. Leverage Active Management: Funds like the Hartford International Opportunities Fund provide access to undervalued opportunities and macro-driven strategies that passive indices cannot replicate.
3. Monitor Geopolitical Catalysts: Stay attuned to developments in Europe, China, and emerging markets, as these will continue to shape risk premiums and capital flows.

In a world where geopolitical fragmentation and macroeconomic uncertainty are the norm, strategic capital allocation is the key to outperformance. By focusing on international equities with improving fundamentals and leveraging active management, investors can navigate volatility while capturing the upside of a more balanced global market. The Hartford International Opportunities Fund offers a compelling vehicle to achieve this, blending disciplined capital allocation with macroeconomic foresight.