It was another difficult year for international markets, which drastically lagged U.S. equities. The outlook for the new year doesn’t look too promising either. The iShares MSCI ACWI ex U.S. ETF (ACWX) is up just 4.6% year to date. In contrast, the S & P 500 has climbed 26% during the same period. Europe’s Stoxx 600 index has also lagged the U.S. benchmark, up just 7% for the year. The Shanghai Composite has climbed around 13% for the year, while the Nikkei 225 has advanced more than 17%. With concerns of slow growth, higher inflation risks and a stronger dollar from U.S. tariffs weighing on international markets — in addition to geopolitical uncertainties — investors aren’t optimistic 2025 will be a better year for international markets. “Many global multi-asset investors are approaching 2025 with some trepidation, and the growing unease is understandable. The list of significant concerns is long,” said Todd Jablonski, chief investment officer at Principal Asset Management. “We expect market volatilities to increase in 2025 and see the same rising risk tides.” ACWX .SPX YTD mountain ACWX vs SPX Many economists and analysts foresee President-elect Donald Trump’s proposed tariffs on countries such as Mexico, China and Canada, and tax cuts as ultimately leading to dollar appreciation. A stronger dollar could hurt international markets by hurting other countries’ purchasing power. “A strong U.S. dollar, fueled by protectionist trade policies, is making imports from the U.S. more expensive and reducing returns for U.S. investors with non-U.S. holdings,” said Richard Ratner, senior vice president at Bel Air Investment Advisors. Foreign exchange headwinds have accounted for much of the rest of the world’s relatively disappointing returns for investors, noted Mark Giambrone, head of U.S. equities at Barrow Hanley. “Currency has been going against those markets for a long time, whether it’s safety [or] whether it was the U.S. increasing rates,” Giambrone noted. “We should have finally been getting to a point where the dollar is going to get weaker, which is very positive for the non-U.S. markets. I don’t see that anymore.” Weak growth worldwide Across Europe and China, growth is forecast to underperform in 2025. To this point, BNP Paribas sees economic expansion in the Euro area at just 1% next year — with the dollar reaching parity against the common currency. The euro was traded around $1.0488 against the greenback on Tuesday. For the year, its down about 5% versus the dollar. “Stagnant growth in Europe is prompting rate cuts, supporting an overweight position in U.S. equities,” said Bel Air Investment Advisor’s Ratner. An uncertain political backdrop has also dented investor sentiment across certain international markets. The French and German governments collapsed this month, underscoring Europe’s lack of key leadership amid its economic troubles. Germany’s slump in manufacturing orders and industrial production numbers also indicate the economy may not be able to continue dodging a recession next year. On top of this, most investors are still sticking to the sidelines on the Chinese market — even after a brief spike in optimism following the Politburo’s rollout of various stimulus measures this year. While policymakers have stated they would ramp up fiscal policy in 2025, ongoing signs of a sluggish property market and weak consumer sentiment indicate a muddled outlook ahead for Chinese stocks. “The bleak outlook remains rooted in a vicious cycle of deflationary risks,” according to Seema Shah, chief global strategist at Principal Asset Management. “High hopes for a policy stimulus bazooka have faded, but fiscal expansion should at least put a floor under economic weakness.” Tariff impacts Trump’s threat of tariffs has created “a rhetorical overhang over international markets,” said Andrew Krei, co-chief investment officer at Crescent Grove Advisors. U.S. tariffs on overseas goods will lead to a stagflationary impact on international equities, he added. The levies will “take materially off of China’s growth,” warned Joyce Chang, the bank’s global head of research, at a Japan Society event in late November. During Trump’s first term, tariffs shaved off around 0.4% from global growth and contributed to slightly higher inflation as well, per Chang. Emerging markets will feel a more outsized effect from the tariffs. For these economies with already weak growth starting points, the drag on net trade and rerouting stemming from the levies will weigh heavily, according to BNP Paribas economists. They highlighted Southeast Asian and Central and Eastern European economies as the most vulnerable to a decline from tariffs. In addition, “companies in countries facing a weak cyclical position (such as the eurozone, CE3 and pockets of EM Asia) may struggle to pass higher input costs along the rest of the price chain, and ultimately on to consumers, thus taking a hit to their margins,” BNP Paribas wrote in its 2025 global outlook. In a contrarian take, Dunham & Associates Investment Counsel chief investment officer Ryan Dykmans thinks Europe could be a beneficiary from the trade war between the U.S. and China. “This could actually boost E.U. competitiveness,” Dykmans said. Pockets of opportunity While the outlook for international markets appears murky, not all hope is lost. In the case that conflicts between Israel and Hamas — as well as Russia and Ukraine — near or complete a resolution in 2025, global markets could experience a “peace premium” that would benefit European and Asian stocks, said Barrow Hanley’s Giambrone. The investor cited conversations with political consultants who believe a Trump administration could pressure the leaders involved in the European and Middle Eastern conflicts to more quickly reach a resolution. Through a “peace premium, commodity prices will come down [as] defense spending also comes down, creating a positive offset,” Giambrone said. On a country-specific level, one market global strategists are optimistic on is Japan. Recent corporate governance reforms have been a major factor in overseas investors’ rising confidence in Japanese companies’ ability to provide returns to investors. Earlier in 2024, the Nikkei 225 managed to climb to a 34-year high before the sharp sell-off in early August. .N225 YTD mountain Nikkei 225 in 2024 “As the economy enters its third year of normalization, we expect Japanese stocks to enter a sustained growth phase, driven by corporate governance reforms that lead to a different pace of corporate behavior,” JPMorgan strategist Rie Nishihara wrote in a Dec. 12 research note. Some macro consequences of Trump’s policy — such as a comparatively weaker yen — will be a tailwind for the Japanese market, Nishihara added. Another overseas market to watch for is India, according to Morgan Stanley strategist Ridham Desai. “India is still the market to beat,” Desai wrote earlier this month. He expects India will be one of the top emerging markets next year. “With strong earnings, macro stability and domestic flows, it is hard to argue against India’s investment case,” Desai added. To be sure, not all of Wall Street is as bullish. Bank of America said it’s stuck “between hope and caution” on Indian equities next year. As the dollar strengthens, Indian stocks could underperform the U.S. market in dollar terms, noted analyst Amish Shah. U.S. policy overhangs also create uncertainty for Indian stocks, he added. “Still, policy easing, coupled with better terms of trade can anchor the medium-term growth outlook, keeping India firmly on a path towards becoming a USD5trn economy in the next three years, and USD10trn in the next decade or so,” BofA economist Rahul Bajoria said in his outlook note on the country.