Non-U.S. Equities in the Spotlight: Defense, Financials, and Tech Outperform Amid Geopolitical Crosswinds

The global geopolitical landscape has never been more fractured, yet this turbulence is creating selective opportunities for investors in non-U.S. equities. As the U.S. grapples with policy gridlock and tariff-driven volatility, Europe, Japan, and China are capitalizing on structural shifts in defense spending, monetary policy divergence, and tech self-reliance. Below, we dissect the key sectors and strategies to navigate these opportunities—while avoiding the pitfalls.

1. European Defense: A Structural Bull Market in Armor and Algorithms

The Russia-Ukraine war has turned Europe into the world's fastest-growing defense market. NATO's new 5% GDP defense spending target by 2035—up from the 2% guideline—has triggered a renaissance in military tech. While fiscal sustainability remains a concern (e.g., Italy's debt at 135% of GDP), the Readiness 2030 initiative is unlocking capital for modernization.

Key Plays:
- Airbus (AIR.PA): A leader in drones and satellite systems, benefiting from NATO's $4.2 trillion spending ramp-up.
- Leonardo (LDO.MI): Italy's aerospace giant, which supplies fighter jets and cybersecurity solutions to EU allies.

Investment Angle: Defense stocks are less cyclical than cyclicals, offering steady returns. However, investors should favor firms with exposure to structural spending (e.g., cyber defense, space systems) over legacy hardware.

2. Japanese Financials: The Yen's “New Dawn” Fuels Profitability

Japan's Bank of Japan (BOJ) is normalizing monetary policy after decades of zero rates, a shift that's supercharging financial institutions. The yen's 6% rally against the dollar since 2024 has improved the net interest margin for banks like Mitsubishi UFJ (8306.T) and Mizuho (8411.T), which now earn more from lending.

Wild Cards:
- Auto Tariffs: U.S. sanctions on Japanese automakers (e.g., Toyota's 24.7% export drop) could pressure banks' loan books. Consider underweighting auto-linked stocks.
- ETF Exposure: The iShares MSCI Japan Financials ETF (EFJ) offers diversified exposure to this sector.

Investment Angle: Overweight financials but hedge against yen volatility. Short-term government bonds or yen-denominated ETFs could mitigate downside.

3. Chinese Tech: Semiconductors and AI Defy Tariff Headwinds

Despite U.S. export controls, China's tech sector is thriving through geopolitical resilience. The June 2025 tariff truce eased pressure on semiconductor equipment firms like ASML Holding (ASML) and Applied Materials (AMAT), which supply tools to Chinese chipmakers. Meanwhile, AI firms like Alibaba (BABA) and DeepSeek are closing the performance gap with Western models via open-source ecosystems.

Key Catalysts:
- Rare Earth Agreements: China's pledge to provide “full magnets upfront” strengthens its dominance in magnets critical for EVs and drones.
- Market Diversification: Exports to ASEAN surged 20.8% in April 2025, reducing reliance on the U.S.

Investment Angle: Focus on semiconductor equipment and AI infrastructure plays. Avoid pure-play Chinese tech unicorns; prioritize firms with global supply chains (e.g., Taiwan Semiconductor's TSM).

Risk Management: Navigating Geopolitical Minefields

1. Europe: Monitor NATO's fiscal sustainability. Countries with high debt (e.g., Italy) may underdeliver on spending pledges.
2. Japan: The yen's rebound hinges on BOJ policy clarity. A delay in rate hikes could trigger a sell-off in financial stocks.
3. China: The 90-day tariff truce's expiration in July 2025 is a critical juncture. Diversify into ASEAN tech partners (e.g., ASEAN Semiconductor ETF) to hedge.

Final Take: A Tripartite Play for 2025

• Overweight: European defense (e.g., Airbus, Leonardo), Japanese financials (EFJ), and semiconductor equipment (ASML, AMAT).
• Underweight: Auto stocks (Toyota, Honda) and speculative Chinese tech without supply chain diversification.
• Hedge: Short USD/JPY futures or use put options on auto-sector ETFs.

The geopolitical storm is here to stay, but it's also a catalyst for outperformance in non-U.S. markets. Investors who pick the right sectors—and stay agile—will thrive in this fractured landscape.

Data as of June 2025. Past performance does not guarantee future results.