Japan and Europe offer diversification as AI stock volatility rattles portfolios

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Japan, Europe offer diversification

Highlights

iShares MSCI Japan ETF is up over 17% in 2024, supported by corporate reforms, a cheap yen, and balanced sector exposure versus Korea and Taiwan ETFs.
JPMorgan Asset Management is more constructive on Europe, citing cheaper valuations than the U.S. and industrials poised to benefit from defense spending, with currency gains adding 0.5 percentage points to returns.
European equities face risks from energy crisis, political uncertainty, and rate hikes, prompting caution despite ongoing case for diversification beyond AI-driven U.S. stocks.

Japan and Europe offer different return drivers

According to CNBC, Japan equities are benefiting from a favorable backdrop this year, with the iShares MSCI Japan ETF up more than 17%. Although that trails gains of 62% for the South Korea ETF and 69% for the Taiwan ETF, Japan's market has a more balanced sector weighting that makes it more defensive against sharp swings tied to semiconductor exposure.

Structural changes are also supporting the market. Corporate governance reforms are encouraging companies to reduce idle cash and focus more on shareholder returns, while improving nominal growth can support earnings and lift equity returns. Lebovitz adds that a cheap yen against the dollar could contribute about 2.4% to expected returns, even if margins remain a drag. Japan also still gives investors access to AI through its technology and manufacturing base.

In Europe, JPMorgan Asset Management has turned more constructive as companies continue to grow and valuations remain cheaper than in the U.S. Lebovitz says a stronger currency could add about 0.5 percentage points to expected returns, while the region also offers a different sector mix, with industrial and manufacturing companies positioned to benefit from higher defense spending.

Regional risks shape allocation decisions

Europe still presents clear risks, including an energy crisis, political uncertainty and the threat of rising interest rates. Those factors are keeping some investors cautious even as the case for diversification strengthens.

Philip Blancato, chief market strategist at Osaic, says he is interested in increasing exposure to Europe but is waiting for greater clarity on how the region approaches AI policy. Even so, the wider market split between AI leaders and other sectors suggests that adding non-U.S. equities can be a prudent way to balance portfolios while preserving upside beyond the dominant tech trade.

In our earlier coverage of Wipro’s quarterly results, we noted signs that overseas IT spending was stabilizing, with a rebound in demand from European clients helping the company top revenue expectations. We also highlighted how artificial intelligence services are starting to generate new revenue streams for major Indian IT providers, adding a fresh growth driver alongside traditional outsourcing work.

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