International equity markets posted robust gains in 2025, with performance shaped largely by macroeconomic conditions rather than fundamentals. Strength was concentrated in capital-intensive and cyclical sectors such as banks and defence, supported by fiscal stimulus, easier monetary conditions against historically depressed valuations, particularly in Europe. Emerging markets also outperformed global indices, helped by a weaker US dollar and strong contributions from economies including South Korea, where export momentum, capital-market reform and AI-related technology leadership proved significant tailwinds.
Artificial intelligence remained a powerful but uneven driver of returns. Companies linked to the physical build-out of AI infrastructure — including foundries, semiconductor manufacturers and hardware enablers — delivered outsized gains, while software-exposed businesses lagged as investors focused on the potential for AI tools to disrupt or deflate parts of their business models.
Against this backdrop, momentum and value factors were strongly favoured in 2025, while quality and low-volatility styles underperformed and served as funding sources for the cyclical rotation. Elias Erickson, International Franchise Portfolio Manager: “For an approach like ours — anchored in a differentiated, fundamentals-driven definition of Quality prioritising long-term 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.”
Looking ahead, the dynamics that defined 2025 are viewed as cyclical rather than structural. Much of the positive surprise that fuelled the rally has now been priced in, and valuations across cyclical sectors appear full relative to history, limiting the scope for further multiple expansion.
“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,” said Erickson.
While predicting the precise timing of any reversal is difficult, history provides context. Periods of pronounced underperformance by international quality equities have typically been followed by relative outperformance as valuations in cyclical areas recalibrate.
Erickson continued: “Over the long run, earnings growth — not momentum — drives share prices,” noting continued confidence that targeted companies are positioned to deliver superior earnings growth relative to the broader market.
The AI revolution is widely recognised as real and potentially transformative, but the current pace of investment may have pulled forward several years of future earnings for infrastructure suppliers. Businesses dependent on large, synchronised capital-expenditure cycles are inherently cyclical, and expectations remain vulnerable to any slowdown in demand, efficiency gains or practical constraints on large-scale datacentre construction.
“Capex cycles are swiftly discounted — first up and then down — so a greater measure of caution is warranted,” Erickson said.
At the same time, enthusiasm for AI infrastructure has translated into widespread scepticism elsewhere in the market, particularly toward high-quality software and information-services businesses.
Erickson continued: “Large language models (LLM) accelerate coding, which services 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.”
Many of these businesses also benefit from structural protections.
“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,” stated Erickson.
International quality equities continue to be viewed as a compelling opportunity, particularly following a year of underperformance relative to cyclical themes. Despite strong ex-US returns in 2025, the international opportunity set remains deep and diverse.
At the same time, the US market is characterised by a high level of concentration, with a small number of technology companies accounting for an outsized share of index weight. Broadening exposure beyond the US can help mitigate these risks, but valuation alone is not sufficient. Erickson concluded: “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.”