Global Investors Seek Higher Returns Beyond the US

The U.S. stock market, once the default destination for global capital, is no longer the sole beacon of opportunity. As valuations in the S&P 500 align with fair value estimates and growth stocks trade at a 16% premium to intrinsic worth, investors are increasingly turning their gaze to Asia-Pacific and emerging markets (EMs). These regions, shaped by divergent macroeconomic trajectories and sectoral rebalancing, offer a compelling mix of risk mitigation and return potential in a world of uneven growth.

Valuation Divergence: The U.S. Premium and Asia's Resilience

The U.S. market's valuation shift in July 2025, driven by concentrated gains in tech giants like Nvidia and Microsoft, has left it trading at fair value but with a stark imbalance. Five stocks alone accounted for $2.2 trillion in market capitalization adjustments, a concentration that raises questions about long-term sustainability. Meanwhile, Asia-Pacific and EM real estate markets, particularly in private equity, have shown greater stability. For instance, Japan's residential sector, with rents rising 8% in Tokyo and Osaka, and Australia's build-to-rent (BTR) model, which offers sticky tenants and premium pricing, highlight structural tailwinds absent in many U.S. sectors.

Public markets in Asia-Pacific, however, remain volatile. Australia and Japan's REITs saw early 2025 gains, but momentum reversed quickly, underscoring the challenges of aligning public and private market valuations. Yet, private real estate—shielded from short-term swings—continues to attract capital, particularly in sectors like last-mile logistics and critical infrastructure. In Singapore, for example, student housing demand is surging due to rising international enrollments, while South Korea's logistics sector benefits from dry storage demand amid supply chain reconfigurations.

Macro Divergence: Rates, Currencies, and Trade Winds

The U.S. Federal Reserve's cautious stance contrasts sharply with EM central banks, which are aggressively cutting rates. J.P. Morgan Research forecasts EM growth to slow to 2.4% annually in H2 2025, but rate cuts and trade de-escalation are fueling currency strength in Asia. The Japanese yen and Australian dollar, for instance, have outperformed the U.S. dollar, making EM assets cheaper for U.S. investors. This dynamic is particularly relevant for sectors like energy and commodities, where EM exposure can hedge against dollar weakness.

Trade policy shifts further amplify this divergence. While U.S. tariffs on China and other partners create uncertainty, Asia-Pacific markets are recalibrating supply chains. Australia's logistics sector, with incentives rising to 20% and rent reversions narrowing, exemplifies how structural demand can offset trade headwinds. Conversely, Hong Kong and Singapore's logistics markets face headwinds from punitive tariffs, illustrating the uneven impact of global trade tensions.

Strategic Reallocation: Sectors and Markets to Watch

Investors are reallocating capital toward sectors with lower downside risk. In Asia-Pacific, necessity-driven segments like residential, necessity retail, and critical infrastructure are gaining traction. Japan's rental market, supported by urbanization and a growing foreign population, and Australia's BTR model, which addresses housing shortages, are prime examples. Meanwhile, EMs are seeing inflows into sectors like healthcare and energy, where undervaluation persists despite macro risks.

The office sector, however, remains a cautionary tale. While Australia's core markets show early stabilization, Hong Kong and China's office markets face prolonged declines due to high vacancy rates and trade-dependent vulnerabilities. Similarly, discretionary retail in Hong Kong and Singapore struggles with weak consumer confidence, contrasting with Australia's resilient necessity retail sector.

Investment Implications and Cautionary Notes

For investors, the key lies in balancing exposure to Asia-Pacific's structural growth with EMs' rate-driven opportunities. Undervalued sectors like healthcare and energy in EMs, combined with Asia-Pacific's logistics and residential assets, offer a diversified approach. However, macro risks—such as U.S.-China trade tensions, inflationary pressures from tariffs, and EM currency volatility—demand careful hedging.

The U.S. market's lack of a margin of safety, coupled with its concentration in a handful of stocks, suggests that global investors should prioritize diversification. Overweighting value and small-cap stocks in Asia-Pacific, while underweighting overvalued U.S. growth equities, could enhance risk-adjusted returns.

In conclusion, the search for higher returns beyond the U.S. is not a rejection of American markets but a recognition of their current limitations. Asia-Pacific and EMs, with their varied valuations and macroeconomic dynamics, present a mosaic of opportunities for investors willing to navigate complexity. As the global economy evolves, the ability to reallocate capital across regions and sectors will be the hallmark of successful portfolios in 2025 and beyond.