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- Malaysian Reserve
A new world order is here. Is your portfolio ready?
Global shifts are challenging US market dominance, putting diversification back in play
by IFAST RESEARCH TEAM
OVER the period from 1994 to 2024, US equities have consistently outperformed their international counterparts. For many young investors, it's hard to recall a time when the US did not dominate global markets. As a result, global diversification has long been a losing strategy for most investors.
Not this year.
The 'Liberation Day' market crash sparked by Trump's tariffs has coincided with rallies in other global markets, including Europe and China. While the S&P 500 recovered most of the losses year-to-date, the MSCI AC World ex-US Index is up more over the same period. While periods of underperformance by the US are not unusual, the gap this year has been particularly pronounced.
A New World Order is Taking Shape
For decades, there has been no bigger winner on the global stage than the US market, with its stellar performance over the years leading to an approximate 63.7% weighting in the MSCI AC World Index (as of 30 April 2025), up from 43.3% back in 2011.
And rightfully so. Investors were drawn to America's exceptionalism: Its technological dominance, deep and liquid financial markets, leadership in free trade, willingness to underwriting global security and a government historically seen as a wise steward of the economy.
However, president Trump's erratic policies — including his on-again, off-again tariff announcements and escalating trade tensions with China — along with his transactional approach to diplomacy, suggest a significant shift in America's position on the world stage. This has prompted the rest of the world to diversify trade partners, forge new alliances and pursue long-delayed economic reforms to boost growth and economic resilience.
The European Union (EU), for instance, has launched a charm offensive to diversify its trade alliances in Asia and beyond. The bloc has resumed long-stalled negotiations with several countries, including India, Malaysia and Thailand.
The clearest sign of the EU's renewed urgency is its revived deal with The Southern Common Market (MERCOSUR), a South American trade bloc that includes Brazil and Argentina. After 25 years of delay, an agreement was finally reached in December. While major European countries such as France and Poland remain opposed, Trump's tariffs could push them towards ratification. Austria, a staunch critic of the deal, has already abandoned its long-standing resistance to the trade agreement.
Furthermore, with the US now stepping back from European security, the continent has significantly ramped up its defence spending. Even German lawmakers have voted to loosen the purse strings, allowing for a huge increase in defence and infrastructure investment — a seismic shift for a country traditionally known for its pacifism and fiscal restraint. The recently concluded UK-EU deal has also drawn a line under Brexit, signalling the start of a much closer relationship.
Changes are Afoot in China
Five years ago, regulators in China launched a sweeping crackdown on technology companies, casting a chill over the private sector. Now, the mood is shifting. Amid China's economic challenges, the government has recognised that revitalising the private sector is crucial to achieving an economy recovery — a task made even more urgent by Trump's tariff war. President Xi Jinping's handshake with Jack Ma — widely seen as the face of China's private sector but sidelined by authorities since the crackdown — at a symposium this year is the surest signal that the party wants the private sector to thrive again.
China has also intensified its efforts to steer the economy toward a consumption-led growth model. A raft of stimulus measures, coupled with a revival in consumer and business confidence, is laying the groundwork for a sustained recovery. The government's strategic focus on artificial intelligence (AI) is also providing new momentum for tech leaders. Meanwhile, the recent revival of China's economic dialogues with Japan and South Korea — both of which have aligned more closely to the US in recent years — suggests
that regional powers are reassessing their relationships in response to Trump's tariff-induced uncertainty.
At the same time, the economic transformation in Japan continues, with inflation, wage increases and interest rate hikes all becoming entrenched. A virtuous cycle of rising wages and prices will stimulate consumption and capital expenditures, opening up a pathway for stronger economic growth in the longer term.
Besides, Japan has shown that it can and will step up to provide international economic leadership. In the absence of the US, Japan has picked up the mantle of leadership in the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). As the US retreats from its traditional role as champion of free trade, Japan will likely step up to fill the void and provide trade leadership together with other open-market allies.
As a new world order takes shape, the global economy likely to become more balanced, with Europe and Asia shouldering more responsibilities for driving growth and providing international leadership. Against this backdrop, diversification has taken on added importance in our portfolios.
An Unprecedented Level of Uncertainty Persists
Another reason for diversification: A great deal of uncertainty persists.
Start with the tariffs. In just a matter of days, Trump's Liberation Day tariffs have injected the global economy with extraordinary levels of volatility and uncertainty. Trade decisions — along with a slew of other major policy decisions — are now made on Truth Social, often catching even his own advisors off guard.
While the tariffs have since been paused, they have not been cancelled. The outcome of ongoing trade negotiations remains uncertain and there's a possibility that the punishingly high tariff rates could be reinstated once the deadline passes. The situation looks increasingly fragile.
As if that weren't enough, the legal wrangling over the tariffs have added yet another layer of uncertainty. Most recently, a US trade court blocked the tariffs, ruling that Trump had overstepped his authority — only for them to be reinstated a day later, pending the appeal process. Trade talks will now be complicated by doubts over the administration's authority to follow through on its threats. Rather than offering relief, the development has introduced new complications at the worst possible time. Besides, even if trade deals are struck before the deadline, there's no guarantee they will hold. Given the unpredictable — and often arbitrary — nature of Trump's decision-making, he could very well renege on these deals.
With no real clarity ahead, U.S. businesses are faced with an unprecedented level of uncertainty, which has been further compounded by other factors.
Lower Market Correlations Help Enhance Diversification
As a risk-mitigation strategy, diversification only reduces volatility if the markets involved have low or negative correlations. If all markets move in lockstep, it doesn't matter how many geographic regions you invest — diversification won't reduce risk. This has certainly been the case over the past two decades, as correlations between US and non-US stocks have risen significantly. In other words, most international markets have moved in tandem with the broader US market.
To conclude, we're not suggesting an end to US exceptionalism. The US remains the largest and most liquid market in the world. It is also home to many high-quality companies that are dominant in the digital economy and semiconductor space. While it might be easy to boycott a company like Tesla Inc due to the availability of alternatives, it's much harder to avoid companies like Google LLC or Nvidia Corp. Therefore, maintaining exposure to the US remains important. However, for investors who already have a substantial US allocation, a global ex-US exchange-traded fund (ETF) can provide substantial diversification benefits.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper's owners and editorial board.
This article first appeared in The Malaysian Reserve weekly print edition
