Why Japan and Europe matter for investors

THE S&P 500 crossed the historic 7,000 mark earlier this year. Yet it is now under renewed pressure amid geopolitical volatility in the Middle East.

Moreover, look beneath the surface, and the picture becomes far more nuanced. A small group of mega-cap stocks continues to account for a disproportionate share of index gains.

While these companies are benefiting from the structural wave of artificial intelligence (AI), such intense concentration leaves little room for disappointment if earnings growth begins to moderate.

Beyond the AI theme, structural growth drivers across the broader US market appear more limited.

For passive investors heavily weighted towards broad US indices, this has important implications. Many believe they are diversified. In reality, they are making a sizeable, concentrated bet on a narrow segment of the technology sector.

That strategy has worked well over the past decade. But successful investing is not about what has worked, it is about what will work next.

With global markets trading at elevated levels and macro volatility rising, the prudent approach is to diversify intelligently.

Here are three compelling reasons to look beyond the US and consider markets such as Japan and Europe today.

Sector and currency diversification

Relying exclusively on the US market exposes investors to significant technology concentration risk. By contrast, Europe and Japan should be viewed as core allocations and strategic diversifiers that can help smooth overall portfolio volatility.

Japan offers compelling opportunities of its own. Earnings growth is being driven by powerful industry tailwinds, particularly in semiconductors. Japan sits at the heart of the global semiconductor supply chain.

Companies such as Advantest and Tokyo Electron provide the critical testing and manufacturing equipment required to produce advanced chips. As demand for AI infrastructure expands, these firms stand to benefit directly.

Importantly, growth in Japan is not confined to technology.

Recruit Holdings, a global leader in HR technology and owner of platforms such as Indeed and Glassdoor, continues to capture digital recruitment demand worldwide. Fanuc, the world’s largest manufacturer of industrial robots, is well positioned to benefit from the global push towards automation.

Europe, meanwhile, provides meaningful exposure to sectors that perform differently across market cycles, including financials, industrials and energy.

European banks are benefiting from a more constructive regulatory environment and are deploying strong capital buffers through share buybacks, reinforcing shareholder returns and improving investor confidence.

At the same time, rising Nato commitments are turning defence spending into a structural growth driver, supporting industrial activity across the region.

Allocating to Japan and Europe also provides important currency diversification.

Japan’s bond market has stabilised as fiscal pressures ease, reducing systemic concerns, while a stronger yen from a divergent central bank policy could enhance returns for foreign investors.

Exposure to the euro adds further balance to global portfolios, particularly during periods when the US dollar weakens or when capital flows broaden beyond the US.

Japan’s corporate governance revolution

The Nikkei 225’s surge to record highs has drawn global attention. Some attribute the rally to a weaker yen or the political momentum following the recent snap election – the so-called “Takaichi trade”. However, focusing only on these short-term drivers misses the bigger story.

Japan is undergoing a fundamental transformation in its corporate landscape. Governance reforms are reshaping how companies operate, shifting their focus from simply surviving to actively rewarding shareholders.

A decade ago, Japanese firms were notorious for hoarding massive amounts of cash, which suppressed their return on equity (ROE) to the mid-single digits.

Today, the Nikkei 225 Index’s ROE has crossed the 10 per cent threshold, rapidly closing the profitability gap with other developed markets. This structural improvement helps justify the higher valuations now seen in Japanese equities and supports a durable, long-term growth story that extends well beyond short-term political trades.

The opportunity extends beyond large-cap names. Japanese small-cap companies offer exposure to domestically driven, resilient businesses that remain attractively valued relative to their larger peers. As the rally broadens beyond the headline indices, this segment could represent the next leg of upside.

Europe’s catalyst-rich healthcare sector

While European equities may lack the flashy, dominant technology leadership that drives the US markets, they are quietly hovering near record highs and offer a powerful engine for defensive growth.

One of the most compelling reasons to allocate capital to Europe today is its healthcare sector. In an environment where global growth may moderate and volatility could return, healthcare offers a rare combination of economic resilience and targeted growth.

Unlike cyclical sectors, healthcare demand does not disappear in a slowdown. People still need treatment, diagnostics and medication regardless of the economic cycle. That defensive foundation is now being paired with a catalyst-rich period of innovation.

The European healthcare industry is entering a wave of major clinical developments in 2026, particularly in oncology and obesity treatments. Several pharmaceutical leaders including AstraZeneca, Novartis and Roche are approaching significant trial results and regulatory milestones that could reshape their earnings trajectories for years to come.

For instance, Novartis is expecting a Phase 3 readout for Pelacarsen, testing a treatment for a previously untreatable genetic cholesterol risk factor that could open a massive preventative market. Meanwhile, AstraZeneca and Roche are racing towards late-stage oncology readouts that represent significant revenue drivers over the next decade.

Looking beyond the US

Record-high valuations across global equity markets do not mean that investment opportunities have vanished. Rather, they dictate that investors must be highly selective about what is driving those valuations.

Long-term investing is not about retreating from markets simply because they are at historic highs; it is about strategically positioning your wealth where sustainable earnings growth remains firmly intact.

By actively diversifying away from the concentrated risks of the broader US market and leaning into the structural corporate reforms of Japan and the defensive growth of Europe, investors can confidently navigate today’s complex, elevated market environment.

The writer is a portfolio manager with the research and portfolio management team at FSMOne.com, the B2C division of iFast Financial, a subsidiary of iFast Corporation