Managers Eye Europe, Japan Amid Mega-Cap Crowding

AUGUST 2025 ACTIVE MANAGEMENT INSIGHTS

Key Takeaways

• Easing trade tensions have triggered a strong market rally, leading to crowding in U.S. mega-cap stocks.
• Managers see additional opportunities in Europe, Japan and emerging markets.
• Managers believe Chinese stocks continue to look attractively valued compared to other regions.

1. Trade Optimism Is Boosting Risk Appetite. 
Progress in trade discussions between the U.S. and key trading partners has helped spark a rally in mega-cap and speculative small-cap stocks. Simultaneously, rising market confidence has led hedge funds to buy back shares they had bet against.

2. Value Investors Are Leaning Into AI.
Value investors are increasing exposure to companies further down the value chain, such as semiconductor equipment, industrial automation, software, and professional services businesses. This reflects a long-term outlook on the AI cycle, with investments focused on building and improving AI infrastructure—including data centers and power utilities.

3. Geopolitical Shifts Are Impacting Markets.
In Europe, increased spending driven by geopolitical changes is boosting the military-industrial complex. In the U.S., uncertainty around tariffs and economic policies is affecting market stability and weakening the U.S. dollar. This is fuelling greater interest in emerging markets.

4. Uncertainty Is Reflected in Sector Performance.
The U.S. healthcare sector faces pressure from policy changes, while the energy sector remains optimistic about natural gas due to long-term growth prospects. In finance, large, diversified banks are favored.

5. Real Estate and Infrastructure May Be in Recovery
As interest rates are potentially at peak, the real estate and infrastructure sectors are showing signs of recovery and growth. Listed REITs are trading at a discount to non-listed real estate and private infrastructure, which investors are watching closely. Government policy trends are boosting renewable energy and midstream waste and energy sectors.

Crowded Trades Remain a Challenge.
The largest mega-cap growth stocks are seen as crowded trades, with many managers holding less exposure due to high valuations and limited transparency. Meanwhile, managers see markets outside the U.S., like Europe and Japan, as attractive for their diversification benefits and potential advantages amid U.S. tariff and currency challenges.

Caution Around the Magnificent Seven.
Although most managers recognize the strong competitive advantages of the Magnificent Seven, they are hesitant to pay premium prices for these stocks due to rising capital demands and uncertainty around long-term profitability and returns.
 

Chinese Stocks Still Look Attractive.
Although investor appetite has been mixed on the back of tariff threats and long-term structural issues, value managers agree that Chinese valuations continue to look attractive. In addition, the Chinese government is expected to add further stimulus if growth falls short of target.

More Opportunities for Outperformance.
Managers expect the recent outperformance of European stocks relative to U.S. stocks—narrowly driven by banks and defense companies—to widen in the months ahead. This is due to a favorable macroeconomic backdrop of cooling inflation and lower interest rates.

 

Domestic-Focused Stocks Preferred.
Many Japan managers favor companies that benefit from domestic consumer demand rather than exporters. This is due to concerns over trade tariffs and currency volatility that could negatively impact international sales.

 

The current macro trends and manager insights highlight a market landscape shaped by trade optimism, AI-driven investment shifts and geopolitical uncertainties. Ultimately, managers are cautiously navigating crowded sectors while seeking opportunities in regions beyond the United States, guided in part by valuations.