The Resurgence of International Value Stocks in a Diverging Global Market

The global investment landscape in 2025 is marked by a seismic shift: international value stocks are outperforming their U.S. growth counterparts, driven by diverging monetary policies and structural economic realignments. This resurgence is not a temporary anomaly but a reflection of deeper forces reshaping capital flows, central bank strategies, and investor sentiment. For value investors, the asymmetry between U.S. and global markets presents a unique opportunity to capitalize on mispriced assets in regions where policy tailwinds and earnings momentum are converging.

The Great Rebalancing: U.S. Growth vs. Global Value

The dominance of U.S. growth stocks—led by the “Magnificent Seven”—has waned in 2025. These tech giants, once the bedrock of the S&P 500, have underperformed by 10% year-to-date, while international equities have outperformed U.S. stocks by 11%. This reversal is partly due to the normalization of interest rates, which has eroded the valuations of high-growth, cash-flow-light companies. Meanwhile, international value stocks—particularly in Europe and Japan—are trading at a 40% discount to the U.S. MSCI World ex USA Index, with trailing price-to-earnings ratios that suggest significant upside potential.

The European story is particularly compelling. Germany's $546 billion infrastructure fund and relaxed borrowing rules for defense spending have catalyzed a 35% YTD surge in European defense stocks. Similarly, energy giants like Shell and HSBC have benefited from higher interest rates and elevated oil prices, while healthcare and industrial sectors have gained traction due to aging populations and innovation cycles. These trends are amplified by active management strategies targeting high-quality value stocks, such as the International Select Equity Fund and the iShares International Dividend ETF, which now prioritize sectors like construction materials and industrial gases.

Monetary Policy Divergence: The New Alpha Source

The Federal Reserve's pivot to a more accommodative stance—expected to cut rates by 75 basis points by mid-2026—contrasts sharply with the European Central Bank's 100 basis point cuts in 2025. This divergence has weakened the U.S. dollar by 12% against a basket of emerging market currencies, boosting the appeal of international equities. For value investors, this creates a double benefit: higher earnings from local-currency appreciation and stronger demand for undervalued assets in markets like China, India, and Southeast Asia.

The Bank of Japan's normalization of monetary policy—a 25 basis point rate hike in October 2025—further underscores the global shift. Unlike the Fed's cautious approach, Japan's aggressive rate hikes signal confidence in domestic recovery, attracting capital to sectors like manufacturing and infrastructure. Meanwhile, U.S. exceptionalism—the narrative of superior economic performance—has crumbled under the weight of rising tariffs, a 2.4% slowdown in global industrial activity, and a 40% probability of a U.S. recession by year-end.

Structural Headwinds for U.S. Growth and Tailwinds for Global Value

The U.S. economy's structural challenges—soaring debt (projected to add $21 trillion in deficits over the next decade) and declining foreign demand for Treasuries—are pushing long-term interest rates higher. This environment disproportionately harms growth stocks, which rely on low discount rates to justify their valuations. In contrast, international value stocks—often in sectors like utilities, banking, and commodities—are thriving in a higher-rate world.

Emerging markets, in particular, are gaining traction. While global growth is slowing, EM central banks are cutting rates more aggressively than their U.S. counterparts, creating a more attractive risk-return profile. Alibaba's inclusion in a value index after its 2024 regulatory-driven slump exemplifies this trend. The Chinese tech giant now trades at a 50% discount to its U.S. peers, offering exposure to a market with 1.4 billion consumers and improving policy clarity.

Strategic Implications for Value Investors

For investors seeking asymmetric opportunities, the focus should shift to regions and sectors that benefit from the new global order:
1. European Defense and Energy: With Germany's fiscal stimulus and the ECB's rate cuts, defense contractors (e.g., BAE Systems) and energy firms (e.g., TotalEnergies) are prime candidates.
2. Emerging Market Value Plays: Alibaba, India's Tata Motors, and Indonesia's Semen Indonesia offer undervalued exposure to growing economies.
3. Active Management: Given the dispersion in returns, funds like the International Select Equity Fund provide tailored access to high-conviction ideas in sectors like healthcare and industrials.

Conclusion: Rebuilding the Portfolio for a New Era

The resurgence of international value stocks is not a passing trend but a recalibration of global capital flows in response to monetary policy divergence and structural economic shifts. While U.S. growth stocks face headwinds from higher rates and regulatory pressures, international markets are offering compelling entry points for patient investors. By tilting portfolios toward undervalued sectors in Europe, Japan, and emerging markets, investors can harness the power of asymmetric returns in a world where U.S. exceptionalism is no longer a given.

In this new era, the key to outperformance lies in embracing the global value renaissance—a shift that rewards those who look beyond the familiar and seek opportunity where the crowd has left.