Global Growth Opportunities in the EAFE Region Amid Macroeconomic Shifts

The EAFE region—encompassing Europe, Australasia, and the Far East—has emerged as a compelling frontier for global growth in Q2 2025. With the MSCI World Ex-U.S. Index outperforming its U.S. counterpart by 15% year-to-date, investors are increasingly pivoting toward markets with stronger cyclical exposure and policy tailwinds. This shift reflects a broader recalibration of global capital flows, driven by divergent macroeconomic trajectories, currency dynamics, and strategic positioning for long-term value creation.

Navigating Currency Dynamics: The Dollar's Decline and EAFE's Resilience

The U.S. dollar, once a safe haven, has weakened by 11% against the euro in 2025, amplifying returns for EAFE equities. Unhedged international portfolios, such as the MSCI EAFE ETF (EFA), have outperformed hedged counterparts by nearly 11 percentage points, underscoring the benefits of currency diversification. This trend is particularly pronounced in Europe, where the ECB's rate cuts and accommodative fiscal policies have bolstered industrial sectors like construction and manufacturing. The euro's strength, coupled with Japan's wage-driven inflation and policy normalization, has created a favorable environment for EAFE equities.

Sector Rotation: Capitalizing on AI and Industrial Rebound

ClearBridge's Q2 2025 EAFE strategy exemplifies how active sector rotation can unlock risk-adjusted returns. The firm overweights communication services, information technology, and industrials—sectors poised to benefit from the AI-driven economy. For instance, Microsoft and Nvidia's earnings growth, fueled by demand for cloud and AI infrastructure, have outpaced broader markets. Similarly, European industrials like Siemens Energy and Vertiv (a data center infrastructure provider) have gained traction as global industrial activity rebounds.

The strategy also rebalances away from underperforming sectors. Financials, for example, faced headwinds due to a softening insurance market and regulatory pressures. ClearBridge exited positions in firms like Publicis Groupe (a French ad agency) and Novo Nordisk, citing competitive and geopolitical risks. This selective approach allows the portfolio to focus on high-conviction, long-term growth plays.

Geopolitical Tailwinds and Strategic Reentry into China

Geopolitical risks, including U.S. tariff uncertainty and regulatory shifts, remain a wildcard. However, ClearBridge's EAFE strategy mitigates these risks through sectoral and regional diversification. A notable move was the reentry into China via Tencent, a digital services conglomerate. Beijing's fiscal stimulus and AI-driven innovation in sectors like healthcare and gaming have made China increasingly attractive, despite its historical volatility. Tencent's WeChat ecosystem, for example, is leveraging AI to expand user engagement and advertising revenue.

The strategy also prioritizes European markets, where structural reforms and fiscal stimulus are enhancing growth prospects. Germany's industrial revival and France's tech sector are key beneficiaries of this approach. By avoiding overexposure to politically sensitive regions and focusing on ESG-aligned opportunities, ClearBridge aims to balance risk and return.

Risk-Adjusted Returns: Balancing Short-Term Costs and Long-Term Gains

While ESG integration and active rebalancing come with short-term costs—such as higher operational expenses and underperformance in momentum-driven sectors—the long-term benefits are clear. Research from Morningstar Sustainalytics indicates that low-ESG risk portfolios tend to outperform during downturns, a critical consideration in a world of rising geopolitical tensions. ClearBridge's EAFE strategy, with its focus on governance metrics and sectoral resilience, is designed to weather macroeconomic shocks while capturing growth in AI and industrial innovation.

Investment Advice: Positioning for a Multipolar World

For investors seeking exposure to global growth, the EAFE region offers a unique combination of macroeconomic tailwinds and strategic flexibility. Key takeaways include:
1. Currency Diversification: Allocate to unhedged EAFE equities to benefit from the dollar's weakening trend.
2. Sectoral Focus: Prioritize AI-driven technology and industrials, while avoiding overexposed or volatile sectors.
3. Geopolitical Prudence: Favor markets with structural reforms and ESG-aligned opportunities, such as Europe and re-emerging China.

In a world of divergent monetary policies and trade tensions, strategic positioning in the EAFE region is not just a bet on growth—it's a hedge against uncertainty. As ClearBridge's Q2 2025 strategy demonstrates, the path to risk-adjusted returns lies in agility, sectoral insight, and a willingness to embrace long-term value creation.