International Growth Equity Positioning in Q3 2025: Sector Rotation and Strategic Adaptations Amid Mixed Global Markets

In Q3 2025, international growth equity markets navigated a complex landscape of divergent economic trends, policy shifts, and sector-specific opportunities. While U.S. equities saw a broadening of leadership from mega-cap growth stocks to small-cap and value segments, non-U.S. markets exhibited a more fragmented rotation, shaped by regional economic dynamics and trade policy developments. Fund managers adapted their strategies to capitalize on these shifts, emphasizing diversification, sectoral selectivity, and exposure to AI-driven growth themes.

U.S. Market Dynamics and Global Spillovers

The U.S. equity market experienced a notable rotation in Q3 2025, with investors shifting capital from stretched mega-cap leaders to small-cap and value stocks. This trend was driven by concerns over valuations in the "Magnificent Seven" and a growing appetite for AI-related opportunities beyond traditional tech giants. For instance, companies leveraging AI for operational efficiency in sectors like healthcare and logistics gained traction. The Federal Reserve's September rate cut signaled a dovish shift, further supporting growth and momentum strategies in technology and AI infrastructure.

This U.S.-centric rotation had mixed implications for international markets. While non-U.S. developed markets did not mirror the same leadership shift, European and UK value stocks benefited from attractive valuations amid macroeconomic uncertainty. In contrast, emerging markets outperformed, driven by strong investor sentiment and policy tailwinds.

Sector Rotation in Non-U.S. Markets

Europe: European equities showed resilience in defensive and regulated sectors such as utilities and consumer staples, which outperformed due to structural trends like electrification and decarbonization. Fund managers maintained an overweight position in technology and financials, reflecting optimism about AI-driven earnings growth. For example, JPMorgan's Q3 2025 Investment Review noted that technology accounted for 40% of equity exposure in European high-yield strategies.

Asia and Emerging Markets: Asian markets, particularly China and Taiwan, emerged as key beneficiaries of the AI and semiconductor boom. The FactSet Asia Semiconductor Index surged 39% year-to-date, fueled by robust demand for AI infrastructure and domestic supply chain advancements. Chinese companies like Jaguar Micro and Biren Technology gained momentum as they developed next-generation AI chips according to Baillie Gifford. Meanwhile, Vietnam and South Korea saw gains from trade policy normalization, while India faced headwinds due to U.S. tariff hikes according to Matthew's Asia.

Fund Strategy Adaptations

Fund managers adjusted their strategies to balance growth potential with risk mitigation. Horizon's Gain and Protect models, for instance, dynamically reallocated portfolios to reflect market conditions, emphasizing AI and international equities while maintaining a fully invested stance. In Asia, Schroder International Selection Fund China A All Cap leveraged government stimulus and supply chain diversification to target quality companies with strong financials.

European strategies also prioritized high-yield sectors with resilient cash flows. JPMorgan's Q3 2025 review highlighted a 4% overweight in high-yield technology and financials, underscoring a pro-cyclical bias. Conversely, materials and industrials were underweighted, reflecting caution over capital intensity and return on investment in energy and infrastructure.

Outlook and Risks

Looking ahead, markets will closely monitor the Fed's ability to balance labor market support with inflation control, while geopolitical tensions and trade dynamics remain key risks. For international growth equity, the focus is likely to remain on sectors with secular growth potential, such as AI, cloud computing, and healthcare, alongside defensive plays like utilities and consumer staples according to Mondrian. However, investors must remain cautious about valuation extremes and concentration risks in large-cap equities according to Savvy Wealth.

In conclusion, Q3 2025 underscored the importance of adaptability in international growth equity strategies. As sector rotations and policy shifts continue to reshape market dynamics, a disciplined approach to diversification and sectoral selectivity will be critical for navigating the evolving landscape.