2025 global investing outlook

While US stocks have recorded new highs recently, shares of high-quality foreign companies may present more compelling opportunities for US investors in 2025 than those pricey domestic equities.

Short-term woes including slowing global growth, rising geopolitical risks, and increasing trade tensions have weighed on international stock prices. That means many stocks now trade at prices that may not reflect their potential for delivering attractive returns in the future. This temporary mismatch may make it a good time for investors to think about adding international exposure to their portfolios.

Many international stocks look like bargains now

As 2025 begins, many countries have slower economic growth than the US. While some economic indicators suggest that the US may be further away from an economic downturn than it was this time last year, most of the rest of the world’s biggest economies are nearing or already in recession.

This matters for investors because stock prices reflect corporate earnings which historically have risen when economies were growing and fallen when they were in recession.

Increasing geopolitical tensions are another source of bad news from abroad. These include increasing trade tensions between the US and China—the world’s 2 largest economies—as well as increasing violence and disorder in the Middle East that could push up energy prices. All this anxiety-making news can obscure the reasons for long-term optimism about international stocks.

Focus on fundamentals, not on fear

Institutional Portfolio Manager Naveen Malwal says it’s important that investors distinguish between companies and the countries where they are headquartered. "International portfolio managers think about global businesses with worldwide revenues. International investing doesn't have to mean a positive outlook on the government or economy of a country. Rather, it's about looking at specific business opportunities that happen to be headquartered outside of the US."

And those opportunities do exist. Fidelity's Asset Allocation Research Team expects non-US stocks to outperform US stocks in the years ahead. That's partly because consumers in emerging market (EM) countries are forecast to be the major source of economic growth and profits for companies over the next 20 years. EMs are expected to grow to comprise about half of global gross domestic product in 20 years, compared with about 40% now and 25% 20 years ago. That's because they have relatively young and growing populations whose incomes will rise as their economies grow. India, for example, already boasts a greater number of households with disposable income of more than $10,000 than does Japan.

Bargain hunting in China…

In 2025, the world’s second biggest economy may contain the world’s biggest bargains. “Several headwinds in China have resulted in historically attractive stock valuations compared with developed-market stocks, leading to promising investment opportunities,” says Sam Polyak who manages Fidelity^® Series Emerging Markets Opportunities Fund () and looks for reasonably priced growth stocks of high-quality companies.

Rising trade and geopolitical friction with the US and Europe may be the most visible of those headwinds to US investors, but China also faces lingering effects of its very strict COVID-related lockdowns, increasing business regulation, and troubled housing markets. “These factors have combined to push stock valuations in China to all-time lows versus developed markets,” Polyak says.

For now, Polyak still believes there are some great deals to be had among Chinese stocks. He says, "China is home to some of the world's most innovative social media, e-commerce, health care, and automation companies, so they’re difficult to ignore when shares of these businesses are trading at what I consider extreme bargains. Many of these are consumer-driven companies that are taking business away from US-listed multinationals."

…and in Canada

Adam Kramer manages Fidelity^® Multi-Asset Income Fund () and he’s been finding attractive opportunities in Canada, even as its economy has slowed and pessimism has risen. “Canadian stocks have a lot of bad news priced in about the political environment there. Canada is not a very business-friendly place right now and is already in recession,” he says. “There'll be an election there in the new year, though, so all you need is for the business cycle signals to get a little bit better with regards to the election.” In the meantime, stocks of many high-quality Canadian companies represent bargains compared with stocks from south of the border. “If you look at the valuations of Canadian stocks to US stocks, you're talking about a big discount relative to history,” says Kramer.

Of course, you shouldn’t buy a stock just because a stock is cheap. Ryan Oldham, who manages Fidelity^® Canada Fund () sees more to like in Canadian stocks than just low prices. Oldham has previously purchased shares of companies that are out of favor but exhibit attractive qualities, such as companies that are poised to benefit from the recent expansion of the Trans Mountain Pipeline, which has increased Canada's ability to transport crude oil.

"The project should boost revenue for Canadian oil exports, which I believe could help improve financial results for domestic oil producers and higher-quality energy service providers," he says. "Even as the world looks for renewable energy sources, I believe oil will remain vital to global economies." Oldham believes Canadian Natural Resources (), Suncor Energy (), and PrairieSky Royalty () may benefit from the pipeline's expansion in the long term. He says that each has the ability to generate strong cash flow from operations, which could propel revenue growth in the next several years.

Consider emerging markets

Emerging Markets (EMs) have been defined as places where the actions of government policymakers may matter to investors at least as much as the rising and falling of the business cycle. That has meant that investing in them involved greater political, social, economic, and regulatory risks than investing in more developed markets.

While EM stocks no longer hold a monopoly on policy risk, they are still likely to be potentially more volatile and less liquid than stocks from developed markets. But because they have not historically moved in lockstep with developed markets, they can help diversify investors' portfolios to help manage risk. Of course, diversification and asset allocation do not ensure a profit or guarantee against loss.

Investors should also keep in mind that the EM category contains a wide variety of companies operating in very dissimilar countries from South Africa to South Korea. The countries that are grouped within the same EM indexes may present very different opportunities and risks to investors. This makes both careful security selection by experienced managers and diversification within portfolios important for spotting opportunity while avoiding undue risk.

As 2025 begins, David Jenkins, who manages Fidelity^® International Small Cap Fund (), sees opportunities in small-cap companies headquartered in EM countries. Jenkins says these under-the-radar investments are often overshadowed by their familiar developed-market counterparts, but they offer the potential for not just growth, but also resilience and innovation. Jenkins says that EM small-caps have historically outperformed not just EM large-caps, but also global small-cap and many developed-market stocks. In fact, he says that EM small-caps have delivered twice the return of EM large-caps since 2021.

To be sure, just as EM countries vary widely in terms of their political, economic, and social circumstances, EM small-cap stocks also vary widely in the levels of risk and opportunity that they present to investors. That makes rigorous research important for investors who want exposure to these sometimes-obscure opportunities.

Jenkins says Athens International Airport () is an example of a unique EM small-cap opportunity. “Its primary business is operating duty-free shops,” he says. "The initial public offering of a 30% stake in the airport—Greece's largest gateway for tourists—generated robust demand among investors and was one of the more successful IPOs in Europe last year.” Greece is a major tourist destination and Jenkins believes that increasing tourism bodes well for the airport's future. In addition, the favorable terms of the concession agreement with the Greek government and the stock's reasonable valuation, based on estimated 2025 earnings, make this investment all that much more compelling, he says.

Don’t overlook developed markets

While EMs may present the most attractive investment opportunity for 2025, stocks of high-performing companies listed in Europe, Japan and other developed markets are also worth considering.

Bill Bower, manager of the Fidelity^® Diversified International Fund (), is also focused on finding high-quality companies that are being mispriced because of negative sentiment about the effects of geopolitical risk. "It's important to focus on high-quality companies that are world class, wherever they may be from," he says. DMs such as Europe offer lower stock prices than the US partly because European Union countries are suffering from slower growth. But Bower says Europe offers more than just lower stock prices. "They're also home to high-quality companies with some unique investment ideas, like LVMH (), which I believe is probably the most unique luxury goods company in the world," he says.

Fidelity^® Diversified International Fund, Fidelity^® Canada Fund, Fidelity^® International Small Cap Fund, and Fidelity^® Series Emerging Markets Opportunities Fund held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.

Of course, risks exist

While international stocks are attractively priced right now, international investing does come with risks that investing only in domestic stocks doesn't. Those include geopolitical risks posed by governments and also risks posed by changes in currency values.

The most important thing for investors to consider about any geopolitical event is whether it has consequences for companies, economies, and financial markets. Geopolitics probably didn't need to be a big part of the investor toolkit during the past few decades when globalization was on the rise. But that period was very unique to world history. Now, investors are going to need to pay more attention to geopolitical risk.

Researching ideas

Those who want to invest outside the US can get professionally managed exposure through mutual funds, ETFs, and managed account solutions. Fidelity has a number of tools to help investors research mutual funds and ETFs including the Mutual Fund and ETF evaluators on Fidelity.com.

You can run screens using the Mutual Fund Evaluator and ETF/ETP Screener on Fidelity.com. Here are some ideas from screens for international stocks as of December 18, 2024. Screener results are for screens for international stock funds and international stock ETFs.

International mutual funds

• Fidelity^® Series Emerging Markets Opportunities Fund ()
• Fidelity^® Diversified International Fund ()
• Fidelity^® International Value Fund ()

International ETFs

• Fidelity^® Emerging Markets Multifactor ETF ()
• SPDR^® Portfolio Emerging Markets ETF ()
• iShares Global 100 ETF ()
• iShares China Large-Cap ETF ()