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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
The author is chief international fairness strategist and head of macro analysis in Europe at Goldman Sachs and writer of ‘Any Completely happy Returns’
At a time when transatlantic commerce tensions are mounting, it may appear an inopportune time for buyers to diversify their portfolios away from the US to Europe. In any case, President Donald Trump has warned he’s planning to impose a 25 per cent further tariff on items from Europe, elevating questions over the fallout on the area’s economies and firms.
However this 12 months has clearly proven that the market penalties of such ructions will be very completely different from what buyers count on. In a extra unsure world, that places a premium on diversification.
On the finish of final 12 months, the time period “US exceptionalism” was all over the place, and for good cause. The US fairness market had outperformed the remainder of the world constantly for one of the best a part of 15 years. This was not irrational, however fairly a mirrored image of its superior fundamentals. The US had generated considerably superior earnings progress relative to different markets ever for the reason that monetary disaster.
The success of the US company sector owed a lot to the extraordinary profitability of the know-how sector, which has more and more been concentrated in a couple of megacap corporations. By the tip of final 12 months, the largest 5 tech corporations within the US made up practically 30 per cent of the worth of the S&P 500 index, a document excessive.
These constant patterns of repeated success rewarded buyers who had concentrated their publicity within the US fairness market, know-how and a handful of corporations. Diversification — as soon as described by Nobel Prize winner Harry Markowitz because the “solely free lunch” in funding — failed to spice up risk-adjusted returns. However repeated success drove valuations of the winners to document relative highs.
Valuation gaps can stay massive and chronic for lengthy intervals. It’s usually solely when underlying fundamentals shift that valuation extremes begin to unwind. That is the place expectations can play an enormous half. What actually issues for monetary market efficiency will not be a lot the trail of future outcomes, however fairly the end result relative to expectations. Europe and Germany are an excellent instance.
The relative weak spot of the European financial system in contrast with the US over the previous decade has been in little doubt. The dearth of European publicity to tech and points associated to excessive vitality costs had been well-understood. Nonetheless, buyers got here into this 12 months too optimistic in regards to the continuation of the developments in equities which have outlined the previous decade, whereas they had been too bearish in regards to the scope to diversify as a method of boosting risk-adjusted returns.
Because the begin of this 12 months, markets have begun to query these assumptions, resulting in broader investor alternatives. First, the US fairness market is underperforming others, notably Europe. Most European indices are up 12 per cent or extra in greenback phrases to date this 12 months relative to a flat efficiency by the S&P 500.
The German inventory market efficiency has been much more putting. To this point in 2025, the Dax 40 index is seeing the second-best begin of the 12 months since German reunification, rising 13 per cent in euro phrases and 15 per cent in greenback phrases.
Second, on the sector degree too, alternatives to diversify have typically been neglected. European banks are a lot smaller than main US tech corporations and so appeal to much less consideration, however they’ve been performing as properly for a few years. European banks are up 20-25 per cent 12 months thus far whereas the US tech sector has fallen.
Third, a number of themes are, for the primary time in an extended whereas outperforming US large-cap tech. The emergence of recent competitors from China has reignited curiosity within the nation’s tech shares (up greater than 35 per cent from a January low to their current excessive).
In the meantime, in Europe, there’s the prospect of decrease fuel costs if we see a Ukrainian peace deal, the potential for elevated fiscal spending following the German election and a pick-up in European governments’ push to decontrol and stimulate progress. Issues is probably not fairly as dangerous because the markets have been pricing.
Expectations and valuation matter. Diversification is an effective method of spreading exposures to spice up risk-adjusted returns over lengthy intervals of time. Whereas circumstances have labored towards this strategy for a lot of the previous decade, the advantages of diversification are reasserting themselves.
