5 reasons non-U.S. equities look attractive

In the first nine months of 2025, foreign equities – especially the shares of European-based companies – have outperformed U.S. stocks by the largest margin in years, and there are signs that this performance gap could continue, according to Fidelity Portfolio Manager Faris Rahman.

“I became increasingly optimistic about international stocks as the first half of the year unfolded,” says Rahman, who manages Fidelity^® Europe Fund (FIEUX). “I believe Europe represents a particularly compelling investment opportunity because of the cheap relative valuations and pockets of improving business fundamentals.”

Year to date through September 31, the MSCI ACWI (All Country World Index) ex USA Index, a benchmark for non-U.S. stocks, gained 26.24%, handily topping the 14.83% advance of the domestic bellwether S&P 500^® index. European stocks within the MSCI index have fared even better, gaining more than 28% year to date.

Rahman points to five performance drivers for non-U.S. stocks. First, foreign capital investment in mutual funds and exchange-traded funds − from places such as Europe, Japan and Canada – has been a driver of U.S. equities over the past 18 years, but reversed course in 2025. He believes this indicates a shift in investor sentiment to diversify more in favor of international markets. He also notes that it takes relatively little incremental capital flows from U.S. toward Europe to have a disproportionately larger positive effect on European equities.

Second, a weakening U.S. dollar relative to other currencies has provided support for non-U.S. developed-market equities. The Bloomberg U.S. Dollar Index fell nearly 10% year to date through September, Rahman notes, explaining that this may support the continued flow of assets into international equities, since a weaker dollar boosts the value of foreign earnings for U.S.-based investors through currency translation.

“Fundamental factors backing a potentially longer-term slide for the dollar include the large and growing U.S. debt and twin deficits of budget and trade,” says Rahman. “Each has hampered international sentiment toward the dollar as a store of value and spurred a trend toward countries attempting to incrementally diversify away from the dollar in trade transactions.”

Third, a broadening of the U.S. stock market, which Rahman says has been led by a narrow set of large-cap growth stocks for several years, may prompt investors to seek a broader set of longer-term investment opportunities in international markets. “If the dominance of these large-cap growth companies begins to fade, it could weigh on U.S. markets, leaving global investors to look elsewhere for opportunities,” he explains.

Rahman adds that while the structural advantages of these companies remain formidable, they may be challenged in new ways, including technological disruption, higher tariffs, rising expenses in their supply chains, maturing markets and increased regulatory scrutiny.

Fourth, after over a decade of austerity and deleveraging post the Global Financial Crisis and the Eurozone crisis, Europe, led by Germany, is starting to drive fiscal stimulus again with a more growth-oriented mindset, Rahman says.

“Indeed, Germany has announced the most significant fiscal spending package since German reunification, and other countries may follow suit,” he says. “Collectively, they’re investing significantly behind defense, infrastructure and clean energy, which has created several tailwinds that were not present before and, as a result, this has provided support for European stocks.”

Lastly, Rahman sees a value opportunity in international developed-market equities – particularly in Europe – as price-to-earnings (P/E) ratios remain attractive relative to the S&P 500®. Despite some narrowing so far this year, the valuation gap between U.S. and European equities is still historically wide, suggesting further room for appreciation as markets move toward long-term averages, he notes.

In helming the Europe fund, Rahman seeks underappreciated quality and growth, with a particular focus on companies undergoing a material, positive change in fundamentals. He tends to favor businesses led by capable, highly aligned management teams that operate with an ownership mindset.

Rahman has positioned the portfolio with overweight stakes (relative to the benchmark MSCI Europe Index) in the information technology, consumer discretionary and communication services sectors. Among the fund's largest individual holdings as of August 31 was SAP (SAPGF), a Germany-based provider of enterprise resource planning software. He notes that the company has produced better-than-expected earnings for several consecutive quarters.

The fund is exposed to higher spending on infrastructure in Europe, most notably in Germany, where the country has earmarked €500 billion for the next 12 years to upgrade infrastructure, including €100 billion for climate-change measures, says Rahman.

He cites three German stocks in the portfolio that exemplify this theme in action: industrial conglomerate Siemens (SIEGY), Siemens Energy (SMNEY) and cement major Heidelberg Materials (HLBZF).

“All three are key players in upgrading Germany’s physical and electric grid infrastructure and integrating renewable energy,” he contends. “I believe these are well-run companies with massively improving growth prospects over the coming years, thanks to these new government-led infrastructure investments.”

For specific fund information, including full holdings, please click on the fund trading symbol above.