International equity markets posted robust gains in 2025, with performance broadly positive but still heavily conditioned by the macro environment. Strength was concentrated in capital-intensive and cyclical sectors — banks, defence, and other beneficiaries of fiscal stimulus, easier monetary conditions, and historically depressed valuations, particularly in Europe. Emerging markets also outperformed global indices, supported by a weaker US dollar and exceptional contributions from economies such as South Korea, where export momentum, capital-market reform, and AI-related technology leadership were decisive tailwinds.
AI remained a powerful but uneven market driver. Companies tied to the physical build-out of AI infrastructure — foundries, semiconductor manufacturers, and hardware enablers — delivered outsized returns. Software-exposed businesses lagged as investors focused more narrowly on the risk that AI tools could automate or erode elements of their business models.
Against this backdrop, momentum and value factors were strongly favoured, while quality and low-volatility styles underperformed and served as funding sources for the cyclical rotation. For an approach like ours — anchored in a differentiated, fundamentals-driven definition of Quality prioritising profitability, earnings resilience, and return stability — these conditions constituted a material headwind. By design, we avoid the more cyclical, commoditised, or capital-intensive models that led markets in 2025, maintaining a consistent focus on compounding fundamental value across the full investment cycle.
We view the dynamics of 2025 as cyclical rather than structural, with the balance of risks increasingly poised to shift back in favour of fundamental return drivers. Much of the positive surprise that fuelled the cyclical rally has now been priced in. After a strong run, valuations across cyclical sectors appear full relative to history — even stretched — reflecting a notably more optimistic stance on future outcomes. Multiple expansion is unlikely to be a disproportional driver of higher returns.
Because rating-driven markets are inherently fickle, we see this as an opportune moment to re-anchor portfolios in more durable, through-cycle drivers of return, especially cash-flow growth. In our view, sustainable fundamental strength, rooted in resilient Quality attributes, is what ultimately underpins long-term shareholder value.
While predicting the precise timing of such a reversal is futile, history provides a useful guide: international quality equities have outperformed the broader market over the past 25 years, and in times when they lag the benchmark by 5% or more on a rolling 12 month basis, they have historically outperformed in the subsequent year. Such episodes typically coincide with the valuations of cyclical areas recalibrating after running ahead of fundamentals. Over the long run, earnings growth — not momentum — drives share prices, and we remain confident that the companies we target are positioned to deliver superior earnings growth relative to the market.
While the AI revolution is unquestionably real — and its technological impact potentially more transformative than the early internet era — the current pace of investment may have pulled forward several years of future earnings and demand for infrastructure suppliers. Businesses dependent on massive, synchronised capex cycles from a small group of global giants are, by definition, cyclical. Moreover, GPUs have finite lifespans measured in years, not decades, unlike fibre-optic networks (the central capex theme of the dot.com bubble); overinvestment in compute is therefore more acute and painful when demand normalises. Expectations are increasingly vulnerable to any attenuation in the progression of large language model capabilities, ecosystem efficiency gains reducing infrastructure requirements, or practical frictions to massive datacenter construction. In 2025, the market rewarded the companies most exposed to the AI capex boom with the strongest near-term momentum. Capex cycles are swiftly discounted — first up and then down — so a greater measure of caution is warranted.
Conversely, AI euphoria translated into doubt across other parts of the market: high quality businesses in software and information services were indiscriminately de-rated as disruption risks and margin pressures were contemplated. We think these risks are exaggerated. Large language models (LLM) accelerate coding, which serves to highlight — rather than displace — other critical aspects of software development, such as domain depth, workflow expertise, and program design. LLMs are increasingly commoditizing, which means their innovation potential is available to both incumbents and disruptors alike. Furthermore, the risk-reward for redeveloping software in-house — especially of mission-critical systems which may cost less than one percent of revenue — can be unfavorably asymmetric: doing so could increase non-core operational risk while potentially reducing competitiveness, dynamic regulatory compliance, and other network benefits. Likewise, many of these de-rated professional and information services firms aggregate and own large, proprietary datasets whose use is often mandated by regulation or contractually protected. For our companies, the majority of their data is inaccessible to AI models. These businesses also exhibit high subscription-retention rates that, in many cases, appear more defensively positioned than the long-dated forecasts underpinning many semiconductor valuations.
While some software assets will inevitably be disrupted by AI, the market’s current judgment appears excessively punitive for many others. Over the long run, AI may in fact amplify the value of businesses further down the technology stack — particularly those with irreplaceable datasets, strong distribution networks, and resilient subscription revenue. These companies offer exposure to the AI theme, but with far narrower uncertainty bands than the infrastructure suppliers currently commanding the spotlight.
We continue to view international Quality as a compelling opportunity, and especially after a year of underperformance to cyclical themes. Investors often overlook that, in most years, roughly three-quarters of the top 100 performers in the MSCI ACWI are based outside the US. While ex-US returns were exceptional in 2025, the underlying international opportunity set has long been both deep and diverse.
At the same time, the US market remains defined by an extraordinary level of concentration. The top 10 companies in the S&P 500 — eight of them technology-related — now account for over 40% of the index, exceeding even the extremes reached during the dot-com era. Such narrow leadership inevitably elevates risk. Broadening exposure beyond the US can help mitigate these concentration risks while unlocking a wider spectrum of global opportunities.
That said, simply rotating into international equities because they appear cheaper risks diluting portfolio fundamentals — particularly at a time when many cyclicals look increasingly extended. In our view, this environment calls for an active and disciplined approach: one that captures the diversification advantages of international markets while remaining firmly anchored to durable drivers of long-term equity value, especially earnings resilience and the steady compounding of free cash flow.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance-related risk events or factors, if they occur, could cause a negative impact on the value of investments. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Individual companies or securities named in this material are included for illustrative purposes only. The views expressed are those of the contributor and do not necessarily represent Ninety One’s house view.
Specific risks. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Style bias: The use of a specific investment style or philosophy can result in particular portfolio characteristics that are different to more broadly invested portfolios. These differences may mean that, in certain market conditions, the value of the portfolio may decrease while more broadly-invested portfolios might grow.
