It’s already clear that investing conditions in 2025 will be very different from 2024.
This year, US stocks once again outpaced the rest of the world, rising over 25%, fueled by the strong performance of stocks that benefit from the artificial intelligence boom and the prospect of lower interest rates. Yet, after the rally, US stocks appear expensive based on our stock-level valuation models and top-down expected return estimates.
In this article, we’ll highlight our best investment ideas for 2025 for those making new investments or wanting to reduce their exposure to the US market. It’s part of Morningstar’s outlook that explores what investors will face as we enter the new year.
Where We See Investment Opportunities Outside the US
As we search for investment opportunities in 2025, our focus naturally shifts to regions outside the US, where we believe investors may achieve better risk-adjusted returns.
The chart below shows our expected returns for various markets. Our asset-class valuation models point to low-single-digit returns in the US, while we expect some of the most attractive opportunities to deliver double-digit returns over the next decade.
We Expect Double-Digit Returns From Most Attractively-Valued Markets
Let’s take a look at the global valuation picture from the perspective of our bottom-up stock-level model from our Equity Research team. As shown in the chart below, our discounted cash flow models by our analyst teams suggest that key markets trade at a discount. This is particularly true in the Asian and Latin American emerging markets.
Key Non-US Markets Trade at a Discount to Their Intrinsic Value
Here’s a closer look at the key regions where we find investment opportunities in 2025.
Emerging Asia After the China Stimulus Bump
We are optimistic about the medium-term prospects for Chinese equities.
Past performance and a few “false dawns” have painted a bleak picture in recent years, but the potential upside remains. There are still structural issues, and key cyclical challenges will take time to resolve. The road is likely to remain bumpy.
Aging demographics, deleveraging, and weak consumer spending represent the core of the challenges. We are encouraged by signs that the authorities are prioritizing policy support to shore up the economy and expect stimulus measures to continue evolving in the coming months. A more benign regulatory backdrop compared with a few years ago is also constructive. Strong returns from the Chinese market toward the end of September and early October illustrated how the picture only needs to become “less bad” to provide a tailwind to returns. As a cyclical recovery takes shape, we anticipate moderate earnings growth from Chinese companies—but it will take time. We also maintain a positive outlook on several of the major Chinese technology firms as consumers regain their footing.
However, careful management of total portfolio exposure is crucial, including sizing aggregate positions to account for the various regulatory, geopolitical, and economic risks that exist in China.
Korean equities represent another opportunity in the Asia-Pacific region. Samsung Electronics SSNLF makes up around 23% of the Morningstar Korea Index. Softer memory demand for non-AI products and doubts over whether the company will qualify as a supplier to Nvidia NVDA, the world’s largest AI company, have led to shares underperforming recently. But with shares trading at roughly 1.1 times book value, near the low end of Samsung’s historical range, these concerns look more than priced in. In its third-quarter 2024 earnings call, Samsung stated that it cleared an important phase in the qualification process for an undisclosed customer, likely Nvidia. A ramp-up in shipments of its latest high-bandwidth memory chips could significantly improve Samsung’s fundamentals and catalyze a rerating.
Dissecting Valuations in European Equities
On an absolute basis, European equities are trading at around a 5% discount based on our bottom-up valuation model. Not cheap, but also not expensive compared with where markets have traded over the past few years. The relative picture is even more compelling with Europe—the UK in particular—making it the most attractive developed-markets region globally. Add to this the macroeconomic tailwinds of rising gross domestic product, falling inflation, and lower interest rates, and the picture looks even brighter.
While a 5% discount to fair value is nothing to be sniffed at, we see even bigger opportunities for investors in Europe when we dig a little deeper. Small-cap stocks, for instance, offer much greater value than their large-cap peers, trading at a whopping 40% discount to their fair value estimate. On a sector basis, the standout areas are consumer discretionary and consumer defensive, which are trading at attractive discounts.
Opportunities Within European Consumer Sectors
Morningstar Rating Distribution by Industry
Within this, we see numerous subsectors with attractive discounts and near-term catalysts to help their share prices converge with their true value. Here are just two examples:
- Homebuilders: UK homebuilders have been through the wringer. At one point, they lost two thirds of their value from the 2021 lockdown highs. Share prices have rallied over the past year, but we still believe names in this space could rise by as much as 50%. Lower interest rates are leading to more affordable mortgages, and supportive government policy should help pave the way in 2025.
- Autos: It seems like the perfect storm for auto manufacturers currently with an influx of Chinese electric vehicles, a weak Chinese consumer, and potential tariffs on exports to the US. But we see huge discounts on many of the big European names. We also believe that with so much negativity baked in, it doesn’t take much good news to move share prices in a positive direction.
Investment Opportunities Emerging in Latin America
Looking back on 2024’s banner year for broad stock indexes, it’s worth remembering that not every market participated. As far as regions are concerned, Latin America was the worst performer.
Mexico, which makes up about one fifth of Latin America’s market capitalization, plummeted almost 22% in 2024 through the end of October, a particularly egregious loss when you consider emerging markets in aggregate were up 12% over the same period.
The country’s recent underperformance can be traced to a few issues. For starters, Mexican stocks, up until early 2024, had been doing extremely well, outperforming broad emerging markets by a huge margin in each of the preceding two years. So, investors were likely poised to take profits. June’s presidential election gave investors a catalyst to sell, too, when the left-leaning Morena party increased its majority and ushered in judicial reforms, worrying investors and business leaders about the future independence of the courts and rule of law. The presidential election of Republican Donald Trump in the US has only put more pressure on Mexican stocks and the peso as markets anticipate more protectionist US trade policies and tensions related to border controls.
Where do we see an investment opportunity emerge? Even when accounting for elevated uncertainty in Mexico, we believe the market provides a decent entry point for long-term, valuation-oriented investors.
First, Mexico’s stock market is more domestically focused, even as its economy has strong ties to the US, making it less vulnerable to any potential trade issues under a Trump presidency. Second, the Mexican equity index is defensive, with more than 40% in consumer staples and communication-services stocks, where steady cash flows, dividends, and strong balance sheets coexist. Third, Mexican stocks are relatively cheap. With US equity markets near peak valuations, valuations in Mexico look more attractive, particularly given much of the future cash flows are coming from stable, defensive sectors. Our valuation models imply an annualized return of 8.5% in US-dollar terms over the next 10 years.
Brazil carries an even higher expected return. Our model implies a 12.5% annualized gain in US-dollar terms over the next decade, making it among one of the most attractively valued countries we track.
Why has Brazil gotten so cheap? Well, its recent troubles owe in part to persistently high inflation there and a resulting central bank pivot to hike rates. The perception of political meddling in the corporate affairs of semi-state-controlled behemoths Vale and Petrobras has also scared away investors. While we acknowledge some deterioration in corporate governance, we believe investors have overreacted. Brazilian companies offer generous yields, thanks to consistently high payout ratios. Granted, Brazil is one of the most cyclically oriented markets that we follow, and earnings will undoubtedly ebb and flow with the global economy. But for those willing to invest through the cycle, this market’s cheap valuation offers a margin of safety not often found.
Macroeconomic and political concerns often sully emerging markets. But for long-term-oriented investors, a period of uncertainty can often be a great time to buy, particularly for those who can ride out short-term volatility.
This article includes contributions from:
- James Foot, Head of Research, Asia-Pacific
- Lochlan Halloway, Market Strategist, Australia
- Nick Stanhope, Senior Portfolio Manager
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
